Travelzoo Could Be Facebook’s Next $1 Billion Acquisition
Earlier this week the big story’s capturing investors attentions was disappointing job numbers from March and the expectation of a weak first quarter earnings season. For those investors that didn’t throw their hands up in despair over the bearish headlines, there was actually a very intriguing announcement made on Monday. It was Facebook’s announcement that the social network giant will acquire Instagram for a cool $1 billion.
For those keeping score at home, that’s $1 billion for a mobile app with no revenue or earnings and a business plan that is yet to be determined. Of course this isn’t just any app, but a widely popular one (at least for Apple users) that has acquired 27 million users. The investment community seemed to widely cheer the Facebook acquisition as a shrewd move by young CEO Mark Zuckerberg.
Following closely on the heels of the Instagram acquisition, Reuters broke a story yesterday that Travelzoo is looking to put itself up for sale. According to the report, the company is in the process of selecting a financial advisor after already receiving interest from several private equity firms.
Travelzoo is a stock that I’ve been watching for a long time and just recently purchased after watching their stock languish since the beginning of the year. After a thorough analysis of the company I came to the conclusion that this was a company that was a ripe takeover target. I was even working on an article that suggested the company evaluate strategic alternatives.
In this case the company beat me to the punch. It’s certainly better to be lucky than good. Now it’s time to take a look at what Travelzoo offers to potential buyers and just who might be interested in acquiring the company.
Travelzoo was started in 1998 and went public in 2002 at a time when nobody wanted to own an internet stock. Unlike other online travel plays (e.g. Priceline, Expedia, etc.), Travelzoo’s business model was to make money from advertising revenue and not from direct bookings. Over the years it developed a user base of 24 million that subscribed to its weekly Top 20 newsletter. While it certainly utilized paid advertising to build this user base, much of their growth was organic via word-of mouth referrals.
Unlike Instagram and Groupon, Travelzoo has a clearly defined business model that has proven successful over the past decade. In 2011, TZOO grew revenues by 32 percent to $148 million marking the highest growth year in the past 5 years. The company also generates healthy operating income margins of 20 – 25 percent.
If Facebook was willing to spend $1 billion to acquire Instagram, Travelzoo would look like a bargain at the same price. Sure Travelzoo has slightly fewer subscribers (24 vs. 27 million). However, it has a successful business model that Wall Street expects will generate $166 million in revenue this year. By way of comparison, Instagram is expected to generate zero revenue this year.
Let’s just compare the two companies based on their users. Facebook paid approximately $37 per user to acquire Instagram ($1 billion for 27 million users). Using that same rate per subscriber for Travelzoo, you arrive at a value of $888 million ($37 per user x 24 million subscribers). Throwing in Travelzoo’s $39 million in net cash and adjusting for their profitable business, you round to a cool $1 billion.
Will Facebook end up acquiring Travelzoo? Probably not. That doesn’t mean it an acquisition wouldn’t make sense or that they shouldn’t take part in the upcoming due diligence process.
Facebook and Travelzoo could be a perfect match. Facebook would acquire another engaged user base of over 20 million that are interested in travel deals. It would also allow the social media giant to dip their toe into the ecommerce waters. This is a strategy that Zuckerberg is doubtlessly considering for the future.
Meanwhile, Travelzoo could benefit from Facebook’s (and now Instagram) expertise in the mobile and social spaces. Travelzoo’s website is in desperate need of an upgrade and the company’s mobile presence is non-existent. Facebook could also offer a tremendous platform for expanding their daily deals business by introducing their email offers to Facebook’s 700 million users.