[Posted on December 21, 2007 - 2:21 AM]
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There was a time when only privately held companies in trouble would merge (think HomeGrocer-WebVan). It was a last ditch effort to live to fight another day. The new IPO criteria that emerged around 2003 requiring larger and more mature startups changed all that. Even so, it's rare to see the first and second most successful startups in a burgeoning segment agree to combine forces. That's what happened when travel search engine Kayak.com raised about $200 million to buy out smaller competitor SideStep for a reported $200 million in cash. 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.
Agreeing on a way to split the pie is usually what prevents deals like this from getting done. Somehow the backers of Kayak.com --General Catalyst Partners, Sequoia Capital, Accel Partners, and AOL-- convinced some of SideStep's shareholders to take the money and run. After being so close to also-run status just a few years ago, they were probably worried their luck had run out. Maybe growth has plateaued.
Whatever the reason, it didn't deter the professionals. Providing the fresh $200 million were SideStep's institutional shareholders -- Trident Capital, Leader Ventures, Saints Capital and Norwest Venture Partners -- along with new investors Lehman Brothers and Oak Investment Partners and Kayak.com's existing investors.
For Kayak.com, the timing for such a deal is right. What was once an innovative vertical search company has now become old news in travel technology. It's the same thing that happened when Kayak.com, SideStep and Mobissimo unleashed their comparison engines on the travel world in 2004. Expedia, Travelocity and Orbitz suddenly looked antiquated. Three years later, a slew of new companies such as TripTie, Tripology, Travelistic, TripIt and Kangol are trying to do to Kayak.com what it did to Expedia.
Valued at about $200 million at its most recent round of funding last year, Kayak.com must now be at or above the $500 million mark. With the addition of a reported $35 million in annual revenue growing at 100% plus another $20 million in new funding, a $1 billion IPO could be the ultimate destination.
General Catalyst provided the first money into Kayak.com. This is the sort of transaction that will continue to burnish their reputation. Norwest also looks good for believing in SideStep when few others did.
The second money into Kayak.com was Sequoia, which led the company's Series B round in 2004. No surprise, Mike Moritz led the deal for the firm. While the firm's equity stake won't be as large as it was with Yahoo, Google or Paypal, if Kayak.com can continue growing at its current rate, Moritz could have another billion dollar exit on his hands. - Joshua Jaffe
Another industry where the top two companies merged is in the online poster and framing business where art.com and allposters.com have done exactly that. Revenues have been said to be north of $100 million now.