Cendant Buys Orbitz For $1.2 Billion, Is Seen As Creating Online Powerhouse
The deal gives Cendant the technology it needs to shed its dependence on a system and business model that it's relied upon to distribute airfares and hotel reservations.
Cendant Corp.'s agreement to acquire Orbitz Inc. for $1.2 billion comes as the travel industry is grappling with a shift in how it distributes its products. The deal not only provides Cendant with one of the strongest online travel brands but gives it the technology it needs to shed its dependence on a system and business model that it's long relied upon to distribute airfares and hotel reservations.
The agreement has been approved by both companies' boards but is subject to regulatory and shareholder approval and is expected to close in November. The deal calls for Cendant to pay $27.50 for each outstanding share of Orbitz stock. That represents a small premium over Orbitz's mid-day Wednesday stock price of $27.20 after shares rose 30% in morning trading. The sale of Orbitz, which was founded in 2000 by American, Continental, Delta, Northwest and United Airlines and is 70% owned by the airlines, figures to give the carriers a modest but much-needed cash infusion amid industrywide financial woes.
Travel distributors such as Cendant, which also owns travel brands such as Avis, Cheap Tickets, and Days Inn, have been under pressure as airlines and hotels increasingly have looked to sell their inventories over the Web rather than the more costly distribution systems they've relied upon for decades. The companies who run those systems--Cendant, Sabre Holdings Corp., Worldspan LP, and Amadeus Global Travel Distribution S.A.--have been developing technologies and business models that will help them weather the changing distribution landscape.
Forrester Research analyst Henry Harteveldt says he's not surprised that Cendant would make such a bold move as acquiring Orbitz, given the difficulty it's had in developing a top Web-based travel outlet. Cendant's Trip Network Inc.--which is comprised of more than a dozen Cendant brands, such as Cheap Tickets, Lodging.com, and Avis--posted the second-largest online traffic figures among travel sites during August, according to comScore Media Metrix, but none of the individual sites that make up the network cracked the top 10. Conversely, Orbitz ranked third, with 13.3 million visitors. Expedia held the top slot, while Travelocity, which is owned by Cendant competitor Sabre, ranked fourth. "The only way for Cendant to work its way into the top three is to buy its way in," Harteveldt says.
But perhaps the most important asset Cendant is getting is Orbitz' Supplier Link technology, which provides travel agencies with direct connections into airlines' central reservation systems, Harteveldt says. Supplier Link and similar direct-connect technologies are becoming increasingly popular with airlines because they offer greatly reduced transaction fees in comparison with what airlines have traditionally paid to use the systems run by Cendant, Sabre, Worldspan, and Amadeus. Those systems have long been the main reservations tool used by travel agents and corporate travel departments, but that's changing as more agents turn to the Web-based booking tools offered by airlines, hotels, and travel sites.
Cendant could have the foundation of a reinvented distribution strategy if it combines Supplier Link with its Jumpstart Web-services offering for linking directly to hotel reservation systems. "The suppliers don't want to sell through GDSs because of the costs involved," Harteveldt says. "With Orbitz and Orbitz Supplier Link and Orbitz for Business [Orbitz's corporate travel-management offering], Cendant is buying what it could never create."
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