Expedia Deep Dive & COVID Rescue Financing

Welcome to the 97th Pari Passu Newsletter,

After last week’s detour from the restructuring world with our Nuclear Deep Dive, we are back to our loved world of restructuring to explore a story that showed everyone that all we do is not just “Kicking the can down the road”.

In 1996, Bill Gates announced a humble new web product: Microsoft Expedia. A union between “Exploration” and “Speed,” Expedia was intended as another product to use the fledgling internet to solve real consumer needs. While Microsoft believed it would “reshape the way consumers plan and purchase their travel” by turning the screen around from the traditional travel agent into the hands of the traveler, few could have predicted the growth of Expedia into the industry giant it is today. This article explores Expedia’s truly unique journey. From becoming a public company, growing aggressively through serial M&A, surviving COVID with the help of rescue financing, to navigating recent industry paradigm shifts, Expedia has traveled quite a distance.

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Origins

In 1994, Richard Barton (who later founded Zillow and Glassdoor), worked in Microsoft’s CD-ROM division. While he was tasked with building travel guidebooks and putting them on disks, he recognized the CD-ROM industry was in decline and transferred over to the Multimedia division. In this new role, he came up with the idea of selling travel online, which he successfully pitched to Bill Gates at the company’s annual product review. At first, Expedia began as a simple website hosted on MSN. It only allowed consumers to make purchases, which were limited to air, car, and hotel reservations. At the time, most consumers only used the internet to browse information, and it was unclear whether they would trust Expedia with large travel purchases. In fact, in response to the launch, the American Society of Travel Agents claimed it would remain a niche offering forever: “There may be a small percentage of do-it-yourselfers who want to book electronically, but most people think their time is too valuable” [1, 2, 3].

Expedia quickly began to prove the doubters wrong. By March 1997, only a few months after its inception, the company reported that it had booked $1mm worth of travel reservations in a seven-day period. In 1998, Microsoft launched the Expedia Associates Program, which enabled suppliers and other companies to use Expedia’s booking engine to set up co-branding websites. In the first year of the Expedia Associates Program, several large travel companies including American Express Vacations, National Rental Car, and Hotel Reservations Network joined the program. These early successes gave credence to Expedia’s vision of a mutually beneficial two-sided marketplace [1, 3].

By mid-1999, Expedia had expanded into the United Kingdom, Germany, Canada, and Australia, and was predicted to be one of the ten largest travel agencies by the end of the year. Taking advantage of this momentum and the exuberance of the dot-com boom, Microsoft decided to float a small piece of Expedia in an IPO in September 1999. While this was the first time Microsoft had spun off one of its businesses, the IPO was a roaring success, with shares closing more than triple the IPO price on the first day trading on the NASDAQ. While the company had never generated a profit, quarterly revenue stood at $15mm and was quickly growing, with over $750mm in total booking value predicted in 1999 [1, 4].

By 2000, the attractiveness of the industry led to the growth of several prominent competitors. One of these competitors was Priceline.com, which sued Expedia, claiming that Expedia’s price matcher service infringed on its patent. A greater threat to Expedia, however, was Travelocity: both companies were locked in an intense battle to be the number one online travel service provider. To improve its position, Travelocity launched a strategic partnership with Priceline.com, and it acquired another rival, Preview Travel. In response, Expedia engaged in its own deals in order to “firmly establish itself as the leader in internet lodging.” In 2000, the company bought market share through the successful acquisitions of Travelscape.com and VacationSpot.com for $95mm and $82mm in stock, respectively. Additionally, Expedia raised money to continue to fund operations through a PIPE financed by Microsoft and Technology Crossover Ventures (TCV), [1, 5, 6].

With the Priceline.com lawsuit settled in 2001, which allowed Expedia to continue to use its price match feature in return for royalty payments, the company looked to continue its explosive growth, with a focus on not only hotels but also broader lodging. The company first achieved profitability in Q3 2001, earlier than a mid-2002 target. The next year, Expedia entered the corporate travel market through the acquisition of the agency Metropolitan Travel [7, 8]. 

Despite this growth, then-CEO of Microsoft, Steve Balmer, wanted to refocus Microsoft on the creation of software, over the development of other businesses deemed “distractions.” As part of this initiative, in 2001 Microsoft divested its 75% controlling stake in Expedia to USA Networks, a media holding company led by media legend Barry Diller. The transaction was financed via stock and other securities, and was valued at between $1.23n to $1.5bn. The acquisition made sense according to analysts, who predicted that Expedia would benefit from the distribution capabilities of USA Networks, which owned various media assets, including several TV channels, while USA Networks would see an opportunity for direct travel sales in the media [9, 10].

Following its shift into internet assets and away from traditional media, USA Networks was renamed InterActiveCorp, or IAC (NASDAQ: IAC). However, the growth of Expedia and other travel assets by IAC meant that travel had grown to over 50% of IAC’s revenue, and was dwarfing the rest of the business, hindering growth and leading to IAC being treated as a travel company by the street. As a result, in December 2004, IAC management announced a plan to separate IAC into two separate companies. One of these companies, which took on the Expedia name, held the assets of Expedia, Expedia Corporate Travel, Hotels.com, Tripadvisor, and several other travel-related companies. In 2005, this plan was executed via a spin-off of Tripadvisor to existing IAC shareholders, taking on the ticker NASDAQ: EXPE [11, 12].

By 2007, Expedia had expanded beyond core travel offerings to also include activities, advertising, and technology solutions such as Media Solutions and Partner Solutions. With over 45mm transactions completed in 2007, the company was growing by double digits across every single metric. In particular, management highlighted international expansion and online proliferation as key future opportunities.

Acquisition Machine

2009 was a difficult year for Expedia given a decline in recreational and business travel, with revenues falling almost 7%. Nevertheless, the company quickly bounced back, supported by the enormous tailwind of online adoption, notching double-digit growth for almost a decade through the end of 2018. This growth was also fueled by Expedia’s return to its early roots: the extensive use of M&A to refine and expand offerings while staving off competitors. Notable transactions are highlighted below:

• 2011: Spin-off of TripAdvisor into a new public company (NASDAQ: TRIP) to “unlock shareholder value”

• 2012: Acquisition of a majority stake in TrivaGo for $632mm to increase European presence

• 2014: Acquisition of Wotif for $658mm to expand into Australia and across APAC

• 2015: Acquisition of Travelocity for $280mm to consolidate market share

• 2015: Acquisition of Orbitz for $1.6bn to consolidate market share

• 2015: Acquisition of Homeaway for $3.9bn to expand into vacation rentals

• 2017: Acquisition of SilverRail for $148mm for train ticket technology

[14, 15, 16, 17, 18, 19]

By 2019, Expedia had the offerings of a full-service travel agency and then some, with a portfolio of 17 brands. Posting revenue of nearly $12.1bn in 2019 with gross margins of 82.9% and EBITDA margin of 10.9%, Expedia had a highly consistent, cash generative business, something reflected in the company’s approximately $20bn market capitalization [20, 21].

The Disruptors Become Disrupted

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