Commentary: Priceline Should Buy Priceline

At Inc. ( PCLN), Plan A clearly is toast. The drop of the company's market value to $542 million from $25 billion in April, 1999, buries once and for all its plan to be the Wal-Mart ( WMT) of the name-your-own price approach, selling everything from long-distance phone service to mortgages. On the other hand, the company has quickly become a force in its core travel market with sales flirting with $1.3 billion this year. And, unlike most dot-coms, Priceline has positive cash flow. People who think Priceline is worthless now are as wrong as those who thought it was worth infinity last year.

What to do? First, Priceline should try Plan B: Get out of the car business, the mortgage business, the long-distance business, and the rest. Concentrate on travel. That, plus cuts in Priceline's advertising, could easily bring the startup's operating cash flow to $70 million annually.

If the public market won't reward Priceline for its discipline (and it probably won't), its managers should turn to Plan C: Take the company private, where they can work out its kinks beyond the punishing glare of Wall Street. Why? Several reasons. First, Priceline lacks the growth prospects to make itself worth anywhere near $25 billion, so it shouldn't manage itself for hypergrowth. Second, Priceline's travel business is better than the market thinks, but the company needs time to focus and build it. And the stock's getting cheap enough to make a buyout attractive.

BEST INFO. Travel works well on the name-your-own-price model because accurate, timely information about travel prices is hard to come by. Airlines' complex yield-management systems, designed to fill the most seats at the highest prices, change those prices by the minute. So only industry insiders grasp how flights and hotel rooms are priced. Priceline helps the market get at least the best information available.

Priceline lacks that edge in other markets. A local realtor can reach just as many mortgage banks, any credit union can get you a cheap car, and phone companies advertise so heavily that consumers know where to find low rates. (See page EB 22.) Plus, cars and mortgages are always available tomorrow, while airline seats must be sold before the flight. Priceline admits its other businesses are growing slowly. And that won't change.

Meanwhile, Priceline's travel business has crushed 1999 forecasts. In two years, Priceline has grabbed 4% of the U.S. air-ticket market. Although its airline ticket sales have plateaued at about 1.3 million tickets per quarter, sales of hotel rooms and rental cars have surged. And Priceline's air-ticket stall isn't so alarming given that the airline industry has grown only 3.3% this year.

Even better, results from the otherwise terrible third quarter suggest that shoppers aren't bailing out. More than half of offers to buy through Priceline came from prior users, vs. 31% the year before. These improving loyalty numbers could help Priceline fend off new competitors like

But a buyout can work only if the numbers add up. Take cash flow. Priceline has had $17.8 million in operating cash flow since April. That's $35 million a year. Then slash ad spending, which has eaten $48 million since Jan. 1. Cutting to 1999's level could save $25 million yearly. (Did anyone feel deprived of Priceline ads in 1999?) The company has cut staff 16%, adding up to $9 million to the pot. That's about $70 million in cash flow to add to $131 million of cash on hand--no small change.

Even if Priceline makes these cuts, Wall Street could respond with a yawn. Management should then reach out to tech buyout funds formed to pounce when markets toss out babies like Priceline with bathwater like Inc. ( IPET), which failed this week. ''If they've reached a sustainable balance on cash flow, it's a very interesting proposition,'' says Roger McNamee, head of buyout fund Silverlake Partners in Menlo Park, Calif. It gets a lot more interesting with the stock at a more affordable $2.50 or $3.

In truth, whether that cash flow is stable is a live question, and nobody will lend money to Priceline until they know how much new competition like Hotwire hurts. Priceline couldn't do an '80s-style leveraged buyout borrowing 90% of the price. An equity partner such as an airline or hotel chain is a must.

Priceline won't comment, but it's a deal worth doing at the right time. Priceline's not worthless. What better way for management to prove it than to buy it themselves?

By Timothy J. Mullaney
Mullaney is E-Business department editor.
Pamela L. Moore in Greenwich, Conn., contributed.

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