Jefferies & Co. expects limited financial impact of Google Inc.'s (GOOG) acquisition of ITA Software Inc. on Expedia, Inc. (NASDAQ: EXPE). The brokerage maintained its buy rating on shares of Expedia with a price target of $31.
While U.S. Department of Justice's conditional approval of Google Inc.'s ITA Software acquisition is an incremental negative for Online Travel Agencies (OTAs), we do not view it as a game changer given Expedia's limited exposure to air (12 percent of revenues), Google will have to agree to a broad set of restrictions, limiting the risks to OTAs and stepped-up anti-trust scrutiny of Google search, which should help contribute to a level playing field for OTAs versus Google, said Naved Khan, an analyst at Jefferies.
Khan believes that Google's entry into air travel search is negative for OTAs on the margin, given the increase in competition. Having said that, the conditional approval by the DOJ for ITA's acquisition lessens the potential threat to OTAs in Khan's view, as it requires Google to share ITA's technology and future enhancements to licensees, while placing restrictions on the use of commercially sensitive ITA data by Google.
Here are the key highlights:
-- Google would be required to continue to license ITA‘s QPX technology for 5 years, maintain R&D at/above current levels and share the enhancements with licensees.
-- Google will also be required to further develop and offer ITA’s next generation InstaSearch product to travel websites. InstaSearch is aimed at providing near instantaneous results to certain types of flexible airfare search queries.
-- Google would have an internal firewall to prevent use of commercially sensitive information and data gathered from ITA customers.
-- Provision for mandatory arbitration under some circumstances and a formal reporting mechanism for complainants if Google acts in an unfair manner.
Federal regulators are considering opening a separate anti-trust investigation against Google for alleged manipulation of search results. This is in addition to similar moves by the EU and the Texas attorney general. Khan believes that the increased scrutiny of Google will help keep the playing field relatively level for OTAs with regard to their placement in search.
We expect limited financial impact of Google-ITA on Expedia, given only about 12 percent of Expedia's revenue is from air and with ITA, Google will also become a source of qualified leads for OTAs (similar to Kayak), said Khan.
In terms of current exposure to Google search, Khan said his analysis using comScore data shows that search phrases on Google containing four common search terms related to air bookings -- Air, Air tickets, Flight and Flight Tickets -- generated 1 million clicks to Expedia sites in Feb, representing less than 5 percent of total clicks to Expedia from Google search.
Khan views the company's announcement to spin-off TripAdvisor as a positive for Expedia. This is supported by his sum-of-parts analysis, which shows that applying a 12-18 times of equity value/EBITDA on TripAdvisor and a still 5 times for core travel, the valuation range puts the stock at $25 to $31.
Expedia is a global on-line travel agency, enabling customers to search for and book travel products and services on-line. Expedia's portfolio of brands include well known websites such as Expedia.com, Hotels.com, Hotwire.com, TripAdvisor, Venere and eLong.
Expedia stock closed Friday's regular trading up 12.95 percent at $25.30 on the NASDAQ Stock Market.