What next for Kayak.com?June 6, 2012: 11:34 AM ET
Facebook's botched IPO chilled the travel site's plans to go public. That's not the only major obstacle it faces.
By Janet Morrissey, contributor
FORTUNE -- The Facebook IPO debacle, which has seen the social network's shares tumble 27% below its IPO price, has spooked other companies planning to go public, with at least one, Kayak Software Corp., putting its IPO plans on ice -- at least for now.
Kayak, an online travel listings site based in Norwalk, Conn., had planned to kick off its roadshow to hype its public offering to large investors around Memorial Day, according to someone familiar with the situation. However, the fallout from Facebook (FB), weak job numbers and the European debt crisis have shaken investor appetite for new listings, especially in the internet sector.
"There's no question that Facebook dealt a blow to the IPO market in the U.S.," says Paul Bard, director of research at Renaissance Capital LLC, a Greenwich, Conn., IPO research and investment management company. "And with the broader market cratering at the moment, it's creating a very challenging and more ominous environment for IPOs," says Bard. As a result, he says there are fewer investors willing to even take a look at an IPO. Morningstar (MORN) equity analyst Dan Su concurs, citing faltering European and shaky U.S. economies.
Fueling investor anxiety further is the fact that other internet IPOs, such as Groupon (GRPN) and Zynga (ZNGA), are trading below their IPO prices. "When investors are not making money on IPOs, they go on strike. Who wants to invest money in a new company if they're going to lose money on day one?" says Bard. "You need the wind at your back to get the IPO market going," adds John Fitzgibbon, founder of IPOScoop.com.
Jessica Casano-Antonellis, a Kayak spokesman, said she could not comment beyond an earlier statement in which she said Kayak is "waiting for market conditions to meet our requirements."
It doesn't help matters that Morgan Stanley, who handled the Facebook IPO, is also leading the Kayak offering. However, Bard says he doesn't believe the Facebook flop has damaged Morgan Stanley's reputation in the IPO space in the long-term. "At the end of the day, I don't think one deal is enough to derail a reputation," Bard says. "Morgan Stanley is one of the most seasoned and proven investment banks and well-respected in their ability to bring companies public, especially in the technology space." Pen Pendleton, a Morgan Stanley spokesman, declined to comment.
Kayak's decision to enter the public arena has long been in the planning. It first filed to go public almost 19 months ago -- Nov. 17, 2010 -- which is almost four times longer than the 152 days that other U.S. companies have waited on average, according to Dealogic. "They probably would have been better off if they went public in March or April when there was a lot of interest and excitement around technology stocks," says Bard.
The question now, is Kayak being overly cautious and perhaps overreacting to the Facebook fallout?
After all, Kayak appears to be on a growth trajectory, something investors tend to like. Kayak's revenue rose 39% to $73.3 milllion in the first calendar quarter of 2012, from $52.7 million during the same period a year ago, according to the company's IPO filings with the Securities and Exchange Commission. It also generated a profit of $4.15 million, or 11 cents a share, in the latest quarter, reversing a loss of $6.91 million, or $1.33 a share, a year earlier.
By contrast, Facebook told investors during its roadshow that its first quarter profit declined on slowing revenue growth, which soured investors as the IPO date drew near.
Traffic to Kayak is also on the upswing. The number of requests for travel information through Kayak's website and mobile application shot up 45% to 310 million in the latest quarter from 214 million during the same period a year ago, the filing said.
Different from websites such as Expedia, Orbitz, Priceline and Travelocity, Kayak doesn't sell airline tickets and hotel bookings on its site. Instead, it displays all of the options other sites offer for travelers in one place, and then provides a link for the person to make the purchase directly from the company offering that rate. It gets paid when people book using the link. It also gets revenue from online ads.
However, Bard says Kayak was wise to delay its IPO as it's unlikely it would have gotten the valuation it deserved had it pushed ahead in the current climate. "Facebook has angered investors -- nobody wants to buy into an IPO that loses money right off the start," says Bard. "In general IPOs get priced at a discount to the market – say 10% to 15% - but in the current situation it would have to be at least a 30% to 40% discount."
Still, Kayak isn't without risk. While the travel site's current financial picture looks bright, its longer-term outlook is less certain, analysts say. Its heavy reliance on ITA Software, which provides airline fare information to people using the Kayak site, is a risk, says Morningstar's Su.
Google (GOOG) purchased ITA in a $700 million deal in 2011, and it's not known how this will affect Kayak when its licensing agreement with ITA expires in October 2016. "A loss of access to ITA's software or enhancements or improvements to the software or an adverse change in our costs associated with use of the ITA software, could have a significant negative effect" on the quality and speed of search results and on Kayak's revenue and operating results, the company said in a filing.
Competition is also a brisk. After acquiring ITA, Google launched hotel and flight search tools and services that compete with Kayak. Hipmunk, Microsoft's (MSFT) Bing Travel and Superfly all want a piece of the pie as well. (Kayak chief financial officer Bill Smith recently left Kayak to joint Superfly. "It's cause for concern when a CFO leaves ahead of an IPO," says Bard).
An even bigger risk is if search engines, such as Google, change their search algorithms to direct people to their own travel services rather than Kayak's site. If this happens, "our ability to attract advertising dollars could be negatively impacted," the company said in the filing.
Bard says Kayak can afford to wait for its IPO. "This is a company that is not in dire need of capital. They don't have debt. They don't need to raise capital to grow the business," he says. Venture capitalists, who funded Kayak, are likely the ones pushing the IPO so that they can cash out all or part of their investment. "They have a certain valuation that management and the VCs think the business is worth, and to get that done in this market, they would have to double or triple the discount in this environment," says Bard. "The real issue is getting the valuation after Facebook scared off investors."