Earlier this year, I told you that Expedia (EXPE) would acquire HomeAway (AWAY). The gist was that HomeAway was a great cash flow business and that some company was going to scoop it up at some point to add to their portfolio.
Expedia, along with Priceline (PCLN), were the most likely candidates, as both have made numerous acquisitions to expand their online travel portfolios, adding to their already excellent organic growth.
So does the Expedia purchase of HomeAway make sense based on the buyout price and how it may help EXPE stock?
Let’s run some numbers, because HomeAway stock is trading about 10% below where EXPE offered to buy it at.
What Was EXPE Thinking?
HomeAway had net income of only $6.1 million in the trailing 12 months, so at first glance it appears that EXPE management has apparently gone insane, or caught the same virus that Priceline’s management did when it overpaid for OpenTable.
However, there are some other considerations before we render judgment.
HomeAway has $920 million in cash (offset by $329 million in senior notes) so there’s a $600 million cash position acquired here. There’s also $153 million in operating cash flow.
So backing out the cash, EXPE paid a net of $3.3 billion for a company making a mere $6.1 million in net income, or … 541 times net income, or 21 times operating cash flow. I suppose the good news is that when compared to the OpenTable deal which went for 40 times cash flow this isn’t so bad.
But does it make sense?
It does, but it may take a very long time before this acquisition pays for itself. There will be synergy as Expedia will be able to boost traffic to its lodging listings. While options like HomeAway and AirBnB are fairly well-known, there is still a large segment of the travel population that either forgets about those options, or may not seriously consider them.
Soon Expedia searches will display HomeAway listings right alongside them. That will increase the visibility of HomeAway’s listings, and therefore encourage those who haven’t yet signed up for HomeAway to do so. That also means more bookings for both services, enhancing revenue.
As time goes on, Expedia will be able to integrate HomeAway into all of its offerings. As search becomes more specialized and refined, the vacation rentals by owner option will take on greater significance.
In addition, should the economy tank, taking vacationing prospects with it, hotels will see declines across the board. The difference between a HomeAway or AirBnB property and a hotel is that the former doesn’t have overhead expenses to worry about. That may mean that in a down economy, VBRO properties will have a significant pricing advantage.
Nevertheless, this is an insane valuation.
The market apparently thinks so, too, because the stock is trading at a $3.5 billion valuation. What I see is that Expedia panicked. It wanted to own a piece of the VRBO space because it will need to compete with AirBnB. So it grabbed HomeAway while it had the chance, but has vastly overpaid using shareholder money.
Think about how much operating cash flow must be earned for Expedia to get its $3.9 billion back — a lot.
This is also instructive for all internet 2.0 businesses. The reason I haven’t shorted things like Twitter (TWTR) is because some company is eventually going to buy it, and will do so for a ridiculous valuation well above where it trades.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.