Quantfury Gazette

Expedia Group (NASDAQ: EXPE) could catch a ride with Uber Technologies (NYSE: UBER)

by
Nathan Crooks
Quantfury Team
Expedia

Expedia Group (NASDAQ: EXPE)—one of the largest online travel agencies with a number of popular brands like Hotels.com, Vrbo and Travelocity—could be going on a trip of its own amid speculation that Uber Technologies (NYSE: UBER) is studying an acquisition of the firm. No deal is certain, however, and the ride-hailing giant may ultimately find there are better ways to use its money.

The Financial Times first reported the interest earlier this month, saying that Uber asked advisers to study a possible acquisition after the idea was suggested by an undisclosed third party. Expedia quickly saw its shares rise 8%, showing how much investors liked the idea. Uber shares declined over 2% just as fast in a vote of skepticism; even though the company has well stated plans to pursue growth and possibly achieve super-app status that remains elusive in the US, it’s widely recognized that most deals fail to create value for the acquiring firm.  

Still, there are reasons why some might find a tie-up intriguing. Uber CEO Dara Khosrowshahi previously served as Expedia’s CEO for 12 years and remains on the travel company’s board of directors. That would make a deal somewhat unique, given the executive’s intimate knowledge of both companies and the ability he’d have to align them and unlock value where others wouldn’t know to look. A travel integration could complement Uber’s existing transport offerings, and even possibly help it use Expedia’s Vrbo brand to take on the king of homestays, Airbnb (NASDAQ: ABNB). 

Khosrowshahi told the FT in a recent interview that Uber wants “to power anyone to go anywhere and get anything,” and travel would be an obvious next step. The company said in its latest earnings report that more people are using its platform than ever before, and more frequently with over 30 million trips booked each day. That’s a lot of riders who may be looking for their next hotel room or flight and already have banking details stored on Uber.

Despite the possibilities, an Expedia acquisition could entail some risk for Uber. It would need to pay a premium to close a deal, and some may argue that cash could be better spent elsewhere, especially as AI advancements begin to disrupt the sector. Uber could alternatively offer many of the travel services through licensing deals with partners instead of having to buy them outright. The company has stressed its plans to continue growing, but some investors could question how much bigger it can get and whether shareholders are better served by increased buybacks or dividends. 

While super-apps are popular in Asia, they’ve remained a tough nut to crack in the US for a myriad of reasons including more fragmented markets, fears about so-called “app bloat” and antitrust regulation. Even Elon Musk and Mark Zuckerberg haven’t yet been able to turn X and Facebook into American versions of WeChat despite flirting with the idea from time to time. 

Nuno Fernandes, the author of a book about mergers called “The Value Killers,” warns against so-called strategic deals that can be justified by a number of “bad reasons” that include “boosting the CEO’s ego” and empire-building. He says would-be acquirers should instead think like financial investors. “Overpaying is the single biggest predictor of a merger disaster,” he wrote in a blog post

That’s where Expedia might actually be interesting. With a market capitalization around $20 billion, its shares have fallen behind rival Booking Holdings (NASDAQ: BKNG) so far this year, rising only 6.8% compared to the latter’s gain of 27%. From a valuation standpoint, Expedia’s enterprise value-to-earnings multiple is around 10 and notably lower than Booking Holdings at 18, potentially making it an attractive target. With the International Air Transport Association painting a robust picture of ongoing travel demand in its latest report, Expedia could be set to benefit from the coming tailwinds and provide outsized returns relative to its current valuation. It may be a good deal, in other words. 

Giving credence to Uber’s ambitions to expand, meanwhile, the Harvard Business Review said in a recent report that different services usually contribute unequally to super-app profits. The publication noted that Beijing-based Meituan makes the most money from hotel and travel bookings despite seeing the majority of its traffic come from food delivery services. That’s a combination that Khosrowshahi must surely be thinking about, and while he may be in a rarely matched position to extract trapped value by combining two companies he knows well, he’d be well advised to tread with caution. Khosrowshahi has a stellar reputation from his time at both Uber and Expedia—where shares rose by a factor of five under his past stewardship before stagnating after he left—but that doesn’t automatically mean the two companies would make good bedfellows. 

“Successful acquirers develop models to identify the pros and cons of a deal, they avoid bidding wars, they exercise the discipline to walk away from bad deals, and they establish processes to keep CEO emotions in check,” Fernandes continued. “Overconfidence is a notorious value killer.”

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