Dan Primack

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Kayak hopes Google/ITA merger doesn't sink IPO

November 17, 2010: 12:59 PM ET

Kayak filed for an IPO today, and the underlying financials show why it's fighting so hard to stop Google from buying ITA Software.

A group of online travel sites last month asked federal officials to block Google's (GOOG) proposed $700 million acquisition of ITA Software, maker of airfare search software upon which many of the sites rely. The lobbying effort named itself Fair Search, and argued that Google/ITA would result in limited consumer choice and reduced price transparency. Or, put another way, it would threaten to put the sites out of business.

That was clearly a fear of Fair Search founding member Kayak, which today filed for a $50 million IPO. It lists the Google/ITA merger as the second most important "risk factor" for investors to consider, followed immediately by adverse competition from "general search companies."

From the filing:

Google could pursue the creation of new flight search tools which will enable people to find comparable flight information on the Internet without using a service like ours... Google may also cause ITA not to renew any agreements with us, or to renew agreements with us on less favorable terms. If ITA or Google limit our access to the ITA software or any improvements to the software, increase the price we pay for it or refuse to renew our contract and we are unable to replace ITA with a comparable technology, we may be unable to operate our business effectively and our financial performance may suffer.

Kayak reported just over $128 million in revenue for the first nine months of 2010, of which over $33 million was derived from airline query-related distributions (i.e., carrier commissions). Approximately 42% of those queries were driven by ITA Software, which means that Google's new pet is directly responsible for nearly 11% of all Kayak revenue.

There also is some indirect revenue generation, as Kayak says that "a significant number" of travelers come to the site to conduct air travel queries, but ultimately buy something else (hotel, car rental, etc.).

Kayak does not disclose exactly how much it pays ITA for its services, except to say its minimum commitment is around $21 million between the beginning of 2010 and the end of 2012 (the contract runs through the end of 2013, but Kayak said it could not project beyond 2012).

For our purposes, let's make two conservative assumptions: Kayak will have flat revenue for the next three years (even though online air bookings are expected to rise by 9% annually) and Kayak's fourth quarter revenue will be just a pro rata extension of its first three quarters (even though Q4 is the year's busiest travel time). Then we'll balance it out with a liberal assumption: The $21 million for ITA is evenly spread across all three years, and that Kayak will not be required to pay a penny more.

Once we've done that semi-specious math, we learn that ITA will directly contribute around $11.64 million in net income this year on $18.64 million in revenue.

How big of a deal is that for Kayak? Well, the company reported just $12.44 million in net income for 2008 and 2009 combined. Take away ITA -- or significantly increase its cost -- and Kayak suddenly looks much less attractive to potential investors.

No wonder why Kayak is worried. Now we just need to figure out why it filed for an IPO before the merger issue gets resolved...

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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