In a deal announced after the trading day ended on November 8, (Nasdaq:PCLN) announced that it will acquire rival travel site KAYAK (Nasdaq:KYAK) for $40 per share. This represents a 29% premium over KAYAK's closing price of $31.04. The deal values KAYAK at $1.8 billion.

Priceline will pay approximately $500 million in cash and $1.3 billion in equity and assumed stock options. The deal is still subject to regulatory approval and a shareholder vote, but is expected to close sometime in the first quarter of 2013.

The stock portion of the deal will be subject to a 10% collar in which those holding KAYAK shares will receive Priceline shares equal to $40 per KAYAK share. (KAYAK shareholders will receive approximately one share of Priceline stock for every 16 shares of KAYAK stock they own.) If the 30-day average share price of Priceline falls outside of the 10% collar lower than $571.31 - or goes higher than $698.27 two days prior to closing - KAYAK shares holders will receive shares based on a fixed ratio.

Founded in 1997, Priceline is one of the few tech companies that survived the dot com bubble. It became famous for its "name your own price" model where customers could set a price they were willing to pay for travel accommodations, rental cars or flights. Priceline picks the company, level of service and basic itinerary information.

In 2005, it de-emphasized the "name your own price" model in order to concentrate on more traditional and higher profit margin pricing methods, although consumers can still use the model.

Priceline's primary revenue comes from referrals, but some view it as the travel site of yesteryear. Although it found notoriety in its viral-like advertising campaign featuring actor William Shatner, many travelers prefer sites like KAYAK that have a stronger mobile presence.

Still, Priceline reported better than expected Q3 earnings. Profits came in at $597 million on revenues of $1.71 billion. Earnings per share totaled $12.40, again easily beating estimates of $11.82. Investors clearly liked what they saw, sending Priceline's stock soaring 8%.

The cofounders of Expedia (Nasdaq:EXPE), Travelocity and Orbitz (NYSE:OWW) founded KAYAK in 2004. Through its website or mobile app, users can compare hundreds of travel sites instead of spending hours searching individual locations, according to the company's website.

On July 19, 2012, KAYAK initially priced its IPO at $26 per share, implying a valuation of $1 billion. However, on the first day of public trading shares closed at $33.18, a 30% increase over the company's original IPO price.

Unlike some notable tech IPO flops like Facebook (Nasdaq:FB) and Groupon (Nasdaq:GRPN), KAYAK reached a low near its IPO price of $26 but has since rebounded to a high of $35.82. Priceline's $40 per share premium represents a nearly 54% gain since its IPO three and a half months ago.

KAYAK's Q3 earnings announcement was as impressive as Priceline's. KAYAK reported revenues of $78.6 million, a year over year increase of 29%. In addition, net income came in at $8 million, a 14% year over year gain. Also notable was the 3.1 million mobile app downloads - a 95% increase from 2011's Q3.

The Bottom Line
KAYAK co-founder, Steve Hafner, said in Kayak's Q3 earnings report, "Paul English and I started KAYAK eight years ago to create the best place to plan and book travel. We're excited to join the world's premier online travel company. The Priceline Group's global reach and expertise will accelerate our growth and help us further develop as a company."

For Priceline, KAYAK represents the newcomer in the online travel search marketplace. KAYAK's growth proves that its model is how people want to search and that may very well revive an arguably tired Priceline brand.

At the time of writing, Tim Parker did not own any shares in any company mentioned in this article.

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