by Clifford Carlsen
[Posted on December 21, 2007 - 4:00 PM]
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DiggInvestors in travel search leader Kayak.com pitched in $175 million in cash to acquire competitor SideStep Inc. as part of a $196 million merger and new funding round for the combined company.
Kayak won confirmation of the soundness of the deal with immediate reinvestment by SideStep investors Norwest Venture Partners and Trident Capital, both of Palo Alto, Calif.
"We have been talking to them for about two years, but never put anything on paper until now; we had talked about an all-stock deal but couldn't agree on what Kayak stock was worth," said Kayak founder and CEO Steve Hafner, who will head the combined company. "It was a left pocket-right pocket deal, with all the SideStep investors cashing out, then two of them coming back in the new round."
In addition to the returning SideStep investors, the new investment round included newcomers Oak Investment Partners of Menlo Park, Calif., and Lehman Brothers Venture Partners of New York, along with debt lenders Silicon Valley Bank of Santa Clara, Calif. and Gold Hill Capital of Boston, as well as previous Kayak investors Sequoia Capital of Menlo Park, General Catalyst Partners of Cambridge, Mass. and Accel Partners, of Palo Alto.
Kayak did not break down the deal terms, but Hafner characterized it as a roughly even split of money going to SideStep founders and other departing investors including Leader Ventures of Atlanta and Saints Capital of San Francisco, and about $100 million coming into the new combined company.
The money supplements about $30 million Kayak had raised in previous rounds, and while Hafner did not disclose a post-money valuation for the deal, he said it "was a nice number," and it likely comes at a healthy premium to the company's estimated $200 million valuation at the close of its C round in May 2006.
Hafner said the combined company will continue both brands, much as online travel agency Orbitz Worldwide Inc., which Hafner co-founded in 1999, has continued to operate the Cheap Tickets.com brand. But he said both sites will be operated using Kayak's core technology, while retaining SideStep's look and feel on its site and incorporating elements into Kayak's product.
"The rationale is to make each Web site better; where we did search really well, SideStep did user generated sales and marketing content really well and we will use that to build audience," Hafner said. "It's like Google vs. Yahoo, where we had the better technology starting in 2005, but they really innovated the category since 1999."
By combining, the company hopes to dominate a fast-growing category of travel services that do not sell services directly, but are advertising- and fee-supported. The combined company reportedly records $85 million in revenue primarily from the fees earned by directing users to the cheapest prices on airfare, hotel and car rentals.
Sequoia general partner Michael Moritz said Kayak has become the Internet's best destination for travel information, and that the combination will reshape the largest sector in online commerce.
Hafner said that while travel comprises about 8% of the U.S. gross domestic product, it makes up about 20% of online commerce. And he said he expects that proportion to increase. The industry is still in its early days," Hafner said. "When we started Orbitz, online sales were about 6% of all travel purchases, and now it is 40%, but it should go to about 70%."
Hafner said he expects that as the market continues to expand, he expects to see additional consolidation, and he said there are things the new company will consider buying, both in technology and customer acquisition.
Kayak worked with Edward Liu of Morgan Stanley in New York on the acquisition and had legal representation from Michael Conza of Bingham McCutcheon LLP.
