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Priceline Group Inc Should Acquire TripAdvisor Inc in 2018

Brian Stoffel, The Motley Fool

In their best-selling managerial and self-help book The ONE Thing, Gary Keller and Jay Papasan introduce "a simple formula for ... extraordinary results: purpose, priority, and productivity." They continue:

The most productive people start with purpose and use it like a compass.
They allow purpose to be the guiding force in determining the priority that drives their actions. This is the straightest path to extraordinary results.

Here's my own rudimentary way of understanding it.

Triangle showing roles of purpose, priority, and productivity.

Idea from The ONE Thing. Illustration by author.

In the business world, mission statements provide the purpose.

The mission statement of Priceline (NASDAQ: PCLN) is "to help people experience the world." It's a great mission: It's simple enough to help guide employee decisions, inspirational enough to motivate employees and customers alike, and has an unending list of ways it could be satisfied.

Here's the problem: Though most of us in the United States have come to associate Priceline with William Shatner's "Name Your Own Price" tool, international operations accounted for 88% of consolidated gross profit in 2016. Of that, a "substantial majority" came from Booking.com, and of that, a "significant majority" came from hotel reservations.

If we were to guess Priceline's mission based on what the company actually does, it would simply be: "to help Europeans find accommodations." It's not that there's anything wrong with that mission -- but if Priceline continues to rest on its laurels with Booking.com, it could be disrupted in short order. Indeed, Airbnb has gone from just an idea in 2008 to a $30 billion valuation today.

How serious a threat is Airbnb?

Priceline's moat is provided by the network effects surrounding Booking.com. It is the de-facto hotel reservation site in Europe, and it is trying mightily to expand to Latin America and Asia. Because it holds this status, travelers know that if they want to find a hotel, Booking.com is the place to go. As more and more travelers flock to the site, hotels -- and even non-traditional accommodators like those listing on Airbnb -- are further incentivized to list.

This is an enviable moat since it's very hard for competition to break this stranglehold. But that is just what Airbnb is starting to do. Obviously, Booking.com is far more likely to retain the big-name chains on its roster while Airbnb focuses on much smaller operators.

But we shouldn't overlook the torrid growth Airbnb has experienced: The number of guests using Airbnb has grown from 3 million in 2012 to over 100 million last year! And industry research uncovered by Recode suggests that "Half of those who used Airbnb last year used it to replace a traditional hotel stay." This could spell trouble for traditional hotels and -- therefore -- Priceline.

Additionally, Airbnb is beginning to offer ancillary services like booking bike rides or surfing lessons while on vacation. If we had to guess which company was truly fulfilling the mission "to help people experience the world," Airbnb would be right on Priceline's heels -- if not in front.

But Priceline can regain the upper hand

This is where TripAdvisor (NASDAQ: TRIP) comes in. The company tried to pivot from just being a review site to an instant booking portal a few years back. The results so far have been disappointing, to say the least.

That failure also presents an opportunity: Shares of TripAdvisor have lost two-thirds of their value since the high-water mark in 2014. Currently trading with a market capitalization of just $4.9 billion, it wouldn't be much of a stretch for $89 billion Priceline to swoop in.

Sign showing major cities of the world.

Image source: Getty Images.

Right now, Priceline has $18.4 billion in cash and investments on its balance sheet, versus just $8.7 billion in long-term debt. Additionally, the capital-light nature of Booking.com helped the company spit out over $4.2 billion in free cash flow over the last 12 months alone.

Even if Priceline paid a 20% premium for TripAdvisor of $5.9 billion, it wouldn't break the company.

What would Priceline get in return?

  • 455 million unique monthly users
  • Over 570 million reviews -- which have been increasing at a rate of 42% per year since 2014.
  • 7.2 million listings, including not only hotels and vacation rentals, but also attractions and restaurants.
  • TripAdvisor has also developed the capability to book activities on its platform. The platform could get a huge boost with an influx of Priceline cash and know-how.

Crucially, while Priceline's moat is destined to be tested by Airbnb in the coming years, no travel review site is even close to the mindshare TripAdvisor currently enjoys, as management claims it is "the world's largest travel site."

But perhaps the greatest argument for Priceline acquiring TripAdvisor comes from a piece by Arjun Sethi -- partner at Social Capital and CEO of MessageMe and Lolapps:

Today we're seeing that a moat -- a barrier that protects a company from low-cost competitors or new, disruptive technology -- isn't enough to build a lasting business.

A moat simply buys a company time to figure out the next great business.

Priceline is fortunate enough to have a business spitting off tons of cash and a very healthy balance sheet. That has given it time to find the Next Big Thing. TripAdvisor is there for the taking -- and Booking.com's moat won't be around forever.

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Brian Stoffel owns shares of Priceline Group. The Motley Fool owns shares of and recommends Priceline Group and TripAdvisor. The Motley Fool has a disclosure policy.