Priceline.com ? 6 October 1999
3
appeal to only a small segment of the consumer buying
population. Because the growth of other priceline services
will not become material quickly enough to offset a
slowdown in the airline ticket growth, the growth of the
ticket business will have to remain strong through 2000.
Long-term, the most important component of the priceline
story is the company?s plan to significantly diversify its
product offerings, gradually rendering airline tickets a
small percentage of overall revenue. If the company is
successful in these efforts?if hotels, mortgages, cars, and
other products blast off as steeply as airline ticket sales?it
is possible that the company?s growth will reaccelerate in
the months and years ahead, as the other products kick in.
This would likely drive the stock higher.
n Microsoft?s New ?Name Your Price? Feature
Microsoft recently announced that it would launch a
?name your price? feature for hotel rooms on its Expedia
travel property. We continue to believe that priceline?s
patent on ?demand collection? is not the core asset of the
company (in the same way that a patent on ?search? didn?t
help Lycos), and we therefore do not regard the Microsoft
announcement as that much of a concern. We would
become concerned about it if Microsoft were to begin to
move a significant amount of inventory (at which point the
question of whether a lawsuit would be forthcoming would
move to the forefront).
n Perceived Share Overhang
We believe that investor concern surrounding inside
shareholders selling stock at the end of the lock-up period
is more of a perception issue than reality. Most of the 144
shares eligible for sale at the end of the lock-up period (6
months following the IPO), have been additionally locked-up
as a result of the company?s follow-on offering and will
not be eligible for sale until February.
Based on information provided by the company, there are
approximately 150 million shares that will become eligible
for sale in February 2000. While this number is large, we
feel it is important to point out a couple of things: 1)
Priceline.com has demonstrated a commitment to
managing the orderly disposition of shares that become
eligible for sale by implementing extended lock-up periods
for directors and executives, and 2) that of the 150 million
shares eligible for sale in February, 119 million (79%) are
beneficially owned by directors and executive officers. In
addition, approximately half of the remaining shares not
already owned by directors and executive officers are
covered by warrants. Upon exercise of these warrants, the
holders will be restricted under rule 144 from selling
shares for one year, unless sold through a registered
offering.
On September 26 th , 5.1 million shares became eligible for
sale following the termination of the lock-up period related
to the IPO. A few important things to note about this are:
1) 5.1 million shares is relatively small when compared to
PCLN?s average daily trading volume of 1.2 million
shares, 2) 5.1 million shares is small when compared to
the 142 million shares that would have become eligible for
sale prior to implementation of the extended lock-up
periods, and 3) the stock has actually traded well this week
(up approximately 5%) despite the increase in shares
eligible for sale. Based on these facts, we believe that
investor concern surrounding this issue is more perception
than reality.
n Risks
The main risk in owning the stock, in our opinion, is
valuation. Other risks include the lack of any good
precedents on which to base an analysis of the long-term
viability of the business model or the size of the market
opportunity and the uncertain acceptance of the
priceline.com e-commerce system by both consumers and
sellers.
[PCLN] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
[PCLN] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
regulated by SFA, and has been considered and issued in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law. The information herein was
obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.
Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments").
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time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report.
This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific
person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that
statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security?s price or value may rise or fall. Accordingly, investors may receive
back less than originally invested. Past performance is not necessarily a guide to future performance.
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