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Microsoft finds direction through Expedia spin-off
By Gracian Mack
Redherring.com
September 28, 1999
Wall Street's analyst community has welcomed Microsoft (Nasdaq: MSFT) decision to spin out its Expedia travel unit through an IPO.
The new issue is expected to hit the market in the next few months through joint underwriting managers Goldman Sachs (NYSE: GS) and Morgan Stanley Dean Witter (NYSE: MWD). The IPO is expected to raise an estimated $75 million.
Michael Kwatinetz, an analyst with Credit Suisse First Boston, notes that Microsoft is pursuing a new focus on core competencies.
Expedia was another card in Microsoft's Internet deck.
Microsoft acquires its position in the universal network.
Travelscape.com is both a partner of and a competitor to Expedia.
"They've made a whole hell of a lot of investments in a lot of different companies over the last few years," says Mr. Kwatinetz. "But they are realizing that having all of these specialty companies is not what they do best. What they do best is infrastructure."
Indeed, recent rumblings from Microsoft's Redmond, Washington, headquarters support the company's shift to backbone services.
"Just look at the Ford deal," Mr. Kwatinetz says. "They said to Ford, We don't want to sell cars, but we do want to be the supplier of that infrastructure that makes it possible for you to sell cars on the Web."
FORDABLE TECHNOLOGY
Two weeks ago, Microsoft announced a new joint venture with Ford Motor Company (NYSE: F) to sell cars via MSN Carpoint, its popular online car-buying guide. Ford is an initial investor in Carpoint.
The Carpoint service will use Microsoft technology throughout Ford's order-handling system, modeled on a direct-sales concept made popular by Gateway (NYSE: GTW) and Dell Computer (Nasdaq: DELL), who have leveraged the Internet to lower inventory costs by shipping PCs only when consumers order them. Using the Carpoint technology, Web surfers will be able to "build a car online," then have it delivered to a local dealership.
Mr. Kwatinetz doesn't expect IPO spin-offs of the Windows operating division or the Microsoft Office software division Encarta.
PLANNING AN EXPEDITION
According to Forrester Research (Nasdaq: FORR), sales in the travel industry have become the largest online retail category, with estimated online transactions of $7.8 billion in 1999, growing to $32 billion in 2004. Still, publicly traded companies competing in this sector are few.
According to a preliminary prospectus, Microsoft "separated" approximately $5.6 million's worth of Expedia assets and exchanged them for an undetermined amount of common stock. After the offering Microsoft will continue to hold controlling interests on more than 80 percent of Expedia stock.
The company's filing with the SEC does not break down the company's performance on a quarterly basis. Expedia posted a net loss of $19.6 million in the fiscal year ended June 30, down 33.5 percent from the $29.5 million loss reported last year. Total revenue was $38.7 million, down slightly from $38.8 million in revenue last year.
Microsoft's spin-off of its Expedia unit may actually have a beneficial effect on competing companies in the online travel industry, helping to boost the entire market.
"The entry of Expedia could raise the valuations of Travelocity.com, maybe Preview Travel [Nasdaq: PTVL] or even Priceline.com [Nasdaq: PCLN]," says James Kissane, an analyst with Bear Stearns (NYSE: BSC). Expedia and Travelocity.com generate about the same amount of business, he says.
THE CONTENDERS
In a straw poll of Wall Street's analysts, Microsoft's Expedia ranks as the No. 1 travel site, but it's no cakewalk. Travelocity is ranked No. 2, and Preview Travel is No. 3.
Travelocity.com is the Internet presence of Sabre (NYSE: TSG) (formerly The Sabre Group Holdings), the electronic travel-reservation system that travel agencies use to book airline, rental car, and hotel reservations. American Airlines's parent, AMR (NYSE: AMR), which developed the system, owns nearly 83 percent of Sabre.
In addition to its own Web site, Preview Travel offers its services through search sites Excite@Home (Nasdaq: ATHM) and Lycos (Nasdaq: LCOS), and it is the primary travel service on America Online (NYSE: AOL). Preview Travel posted revenue for the six months ended June 30 of $12.9 million, up 134.8 percent from $5.5 million in sales in the same period last year. The company also reported a loss of $9.7 million, down from a net loss of $12.9 million during the first half of 1998.
WHO'S THE NEW KID?
On September 15, Getthere.com filed with the U.S. Securities and Exchange Commission for an estimated $75 million IPO of its own.
A new combatant in the travel wars, Getthere.com's IPO is expected at about the same time as Expedia's. Getthere.com will have Donaldson, Lufkin & Jenrette (NYSE: DLJ) as the lead manager of the underwriting and Salomon Smith Barney, Bear Stearns, and W.R. Hambrecht as comanagers.
For the six months ended June 30, Getthere.com reported revenue of $5.6 million, up 107 percent from $2.7 million in sales reported during the same time last year. Net losses ballooned to $20 million, up 214 percent from a net loss of $6.5 million in the comparable period a year ago.
Although a newcomer, Getthere.com has powerful allies. It is backed by principal shareholders United Airlines (NYSE: UAL), which holds a preoffering equity stake of approximately 33 percent. American Express (NYSE: AXP) holds an 18 percent stake and William Hambrecht (of underwriting fame) sits on the board of directors with a small holding of his own.
Microsoft
Travelocity.com
Preview Travel
Getthere.com
Priceline.com
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