CAGR 07-18 24% 14% 17% 62 43 in the online travel agency market, Priceline introduced a 'Name Your Own Price' offering in 1997 that enabled airlines and hotels to market unsold inventory 44 to the highest bidder on a one by one basis, rather than implementing a wholesale reduction in their prices. 45 Priceline was founded in 1997 with a new business model at the low-end of the travel market. 46 47 Revenues and Growth 48 Booking acquires Kayak in Expedia acquires Travelocity and Orbitz 49 2013 Expedia acquires Trivago 50 Revenues (SMM) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 51 BKNG 1,409 1,885 2,338 3,085 4,356 5,261 6,793 8,442 9,224 10,743 12,681 14,527 52 EXPE 2,665 2,937 2,955 3,034 3,449 4,030 4,771 5,763 6,672 8,774 10,060 11,223 53 oww 859 870 738 757 767 779 847 932 54 Booking acquired Open Table TRIP 298 352 485 637 763 945 1,246 1,492 1480 1,556 1,615 55 Total 4,934 5,990 6,384 7,361 9,209 10,833 13,357 16,383 17,388 20,997 24,297 27,365 56 *Market excludes Travelocity a major independent player until 2015 when it was acquired by Expedia. Expedia sells TripAdvisor to shareholders in stock distribution 57 58 Market Share 59 BKNG 29% 31% 37% 42% 47% 49% 51% 52% 53% 51% 52% 53% 60 EXPE 54% 49% 46% 41% 37% 37% 36% 35% 38% 42% 41% 41% 61 Oww 17% 15% 12% 10% 8% 7% 6% 6% TRIP 5% 6% 7% 7% 7% 7% 8% 9% 7% 6% 6% 63 64 Revenue Growth 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 65 BKNG 25% 34% 24% 32% 41% 21% 29% 24% 9% 16% 18% 15% 66 EXPE 19% 10% 1% 3% 14% 17% 18% 21% 16% 31% 15% 12% 67 oww 14% 1% -15% 3% 1% 2% 9% 10% TRIP 18% 38% 31% 20% 24% 32% 20% - 1% 5% 4% 69 Average 20% 15% 7% 19% 22% 15% 20% 22% 15% 16% 13% 10% 70 71 How would you describe the structure of the travel industry? 72 Hint: Examine the market shares above in the context of the definitions in the 'INTRO Strategy' Sheet. 73 74 Pure competition 75 76 Let us analyze the strategic levers presented in the 'INTRO Strategy' Sheet that have strategic implications to this travel industry. 77 Which company appears to have had the first mover advantage? 78 79 80 A second competitive change occurred when an innovative offering was launched in Europe to market hotel rooms from small mom-and-pop and independent boutique hotels. 81 Most of these hotels were too small to own and manage their own websites at the time this online travel marketplace launched. 82 This fostered a boom in demand for independent (non-chain) small and boutique hotels, a heretofore fragmented and underserved market and Disrupted the online travel agencies a second time. 83 Looking at the growth and market share from 2007-2012, which company was the driver of this new competitive change? 84 85 86 From 2007 through 2012 what was happening to market share? 87 00 68 next Workbook, we will discuss market Disruptions in greater detail. Profitability Now let's look at the profitability of the industry and its major competitors. 97 99 102 103 104 105 106 62% 100 190 111 112 113 116 117 118 190 119 27% 12% 49% 279 17% 122 Expedia's profits eroded over time as Booking was able to sustain its superior profitabilit 2008 2009 2010 2018 2007 11% 11% 10% 112 21% 11% 128 As the first mover, Expedia also enjoyed superior profitability coming out of the starting gate 129 How much greater were Expedia's EBITDA Margin in 2007 than Booking? 126 -86% 122 Expedia's profits eroded over time as Booking was able to sustain its superior profitability. 123 124 Net Margin 2007 2008 2009 2010 2011 2012 2013 2014 2015 125 BKNG 11% 10% 21% 17% 24% 27% 28% 29% 28% EXPE 11% 11% 14% 14% 7% 5% 7% 11% 127 128 As the first mover, Expedia also enjoyed superior profitability coming out of the starting gate. 129 How much greater were Expedia's EBITDA Margin in 2007 than Booking? 130 131 132 Across all competitors, the online travel industry achieved strong profitability as a young market taking share as offline bookings moved online. 133 As suggested above, this was because online agencies enjoyed significantly lower cost and higher value than their offline counterparts. 134 Did the online travel industry represent 'value based pricing' or 'cost based pricing'? 135 136 137 in the 1990s, the online travel agency market enjoyed economies of scale. 138 Economics were characterized by: 139 - high fixed to develop and maintain a hotel transaction processing engine 140 - low variable costs per transaction 141 By mid-2000 the industry's barriers to entry dissipated. 142 The benefits of these early infrastructure investments were greatly diminished due to new, lower cost alternatives for transaction processing. 143 144 Which company spent very little on R&D and was still able to gain significant market share? 145 146 147 By 2010 or thereabouts, the travel market faced a competitive onslaught from new comparison shopping engines that created a dramatic increase in price transparency. 148 Metasearch engines crawl the websites of travel agencies and travel service providers to provide rich comparison shopping experiences. 149 These real-time comparison shopping solutions provide comparisons across price, features, availability and quality. 150 Metasearch players make money by collecting referral fees from agencies and service providers and from advertising revenue. 151 Well known players include Kayak (Booking, 2013-present), TripAdvisor (Expedia 2004-2011), Trivago (Expedia 2013-present) and TravelZoo. 152 Metasearch players impact the online travel agency market by: 153 Enabling full, transparent price discovery 154 Commoditizing the service of online travel agencies, making the source of the hotel room or airline ticket indistinguishable and undifferentiated 155 -Undermining the travel website brand value 156 -Challenging the network effect 157 is the advent of these services favorable or unfavorable for online travel websites? 158 159 With low Barriers to Entry, if more players enter the market, is the pricing model more likely to be similar to an Oligopoly or a Competitive market going forward? 160 161 Who might a new entrant be 162 IND 163 164 Liquidity and Cash Flow 165 More often than not, when companies grow revenues, they grow their investment in Non-cash Working Capital year-over-year which reduces Free Cash Flow. 166 For example, a company seeing a 10% growth in revenues may also see a 10% growth in Accounts Receivable and Inventories. 167 And, typically, Accounts Receivable and Inventory are a greater percentage of their revenues than Accounts Payable and other Non-Debt Current Liabilities (excluding Short-term Debt). 168 Therefore, when the company grows, Non-cash Working Capital increases year/year and reduces Cash Flows from Operations and Free Cash Flow. 169 Online travel agencies perform counter to this pattern and see increases in Cash Flows from year/year changes in Non-cash Working Capital. 170 They enjoy a favorable operating cycle. 171 For online travel agents Non-debt Current Liabilities (e.g., Accounts Payable) are a greater percentage of revenues than Non-cash Current Assets (e.g., Accounts Receivable, Inventories). 172 Consumers pay travel agencies up front for rooms and airline tickets, so that sales create little to no Accounts Receivables (to tie up cash). 173 When travel agents act as the merchant of record (more typical for hotels), the travel agent does not pay the supplier until the consumer actually checks out of the hotel room or takes the flight typically a few months later. 174 Thus, the travel agent will have high Accounts Payable. 175 When the companies grow, they actually generate positive cash flows from year/year changes in Non-cash Working Capital. 176 177 Cash Flows from the Year-over-Year Change in Non-cash Working Capital 178 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 179 BNG (24) (16) 63 33 97 110 64 (27) 16 236 293 115 180 EXPE 220 (86) 229 88 232 718 107 549 525 169 639 382 181 182 The online travel agencies Cost of Revenues are associated with transaction processing, rather than the manufacturing of goods. 183 Thus, there is limited investment in Property, Plant & Equipment (PP&E). 184 Both Booking and Expedia enjoy a negative Tangible Capital Invested in Operations (CIO). 185 As a reminder from the Balance Sheet Workbook: 186 Capital Invested in Operations (CIO) = Capital (Debt + Equity) - Excess Cash & Marketable Securities 187 Tangible Capital Invested in Operations (T-CIO) = Capital Invested in Operations (CIO) - Intangible Assets 188 189 Tangible CIO 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 190 BKNG 13% 6% 8% -2% -2% -8% -11% -15% -13% -12% -19% -16% 191 EXPE -61% -41% -54% -24% -41% -53% -47% -49% -56% -39% -34% -28% 192 193 As a review of the analysis we conducted in Balance Sheet (Workbook 5), which of these phrase best explains the negative values for Tangible CIO? 194 195 470 2017 4,915 10,538 2018 5,035 10,112 196 Acquisitions and Intangible Assets 197 Acquisitions have been a major factor in generating growth in the online travel industry. 198 Bookings was created by Priceline's acquisition of Active Hotels and Booking (Booking.com) in 2004 and 2005 respectively. 199 From 2002-2008, Expedia made very few acquisitions. 200 The resulting growth varied dramatically for Expedia and Booking. 201 Booking's revenues grew at a torrid 24% CAGR over the decade through 2018 versus Expedia's 14% revenue CAGR in the same timeframe. 202 However, Expedia has been able to roughly parallel (and slightly surpass) Bookings' Revenues growth from 2015 through major acquisitions. 203 Booking's success came from targeting smaller independent boutique hotels that paid less ('agency model"), the underpenetrated low-end of the market 204 virtually ignored by Expedia, which was focused on the higher margin ('merchant model) Expedia enjoyed by serving major US hotel chains (e.g., Marriott, Hilton). 205 By 2008, Expedia responded to the competitive onslaught with its own acquisitions. 206 By the time Expedia acquired Venere in 2008, Booking had already established itself as a market leader in the rapidly growing European market. 207 To improve its competitiveness, Expedia went on a shopping spree 2013-2015 amassing nearly 'everyone else' including major agencies Travelocity and Orbitz, 208 vacation rental agency HomeAway and metasearch engine Trivago. 209 In particular, Expedia's acquisition of Travelocity and Orbitz in 2015 resulted in the creation of extremely large Intangible Assets. 210 Doubled Expedia's Intangible Assets 211 Added the value of Intangible Assets to Expedia's Balance Sheet as the value on Booking's Balance Sheet 212 213 Intangible Assets ($ millions) 214 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 21S BANG 520 523 743 705 731 2,788 5,661 5,543 4,391 216 EXPE 6,977 4,372 4,427 3,612 3,621 3,837 4,775 5.246 10,787 10,389 217 218 This created a spike in Intangible Assets/Sales for Expedia, which it grew out of over the next four years. 219 Notice that in 2008 Expedia took a charge (Impairment of Goodwill) that reduced Intangible Assets by more than 30%. 220 This size of this Impairment of Intangible Assets represented a full year of Revenues. 221 Such large write-offs of Intangible Assets is not uncommon. 222 223 Intangible Assets/Sales 224 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 225 BKNG 33% 28% 22% 24% 16% 14% 41% 67% 60% 41% 226 EXPE 262% 149% 161% 119% 105% 95% 100% 91% 162% 118% 227 228 The analysis of Expedia's Intangible Assets provides an opportunity to highlight another Data Integrity issue. 229 One must be careful about analyses based on ratios which camouflage what is a common issue that the denominator changes as a result of the changes in the numerator. 230 in the below analysis of Intangible Assets/Capital, the spike in Expedia's Intangible Assets is hidden by the significant increase in Expedia's Capital as a result of its acquisition spree in 2015. 231 232 Intangible Assets/Capital 233 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 234 BANG 40% 48% 34% 32% 22% 13% 32% 46% 37% 26% 235 EXPE 117% 111% 121% 91% 102% 105% 123% 125% 123% 117% 236 237 Expedia's Intangible Assets are greater than those of Booking based on the following metric: 238 220 2017 39% 2018 35% 90% 105% 2017 24% 101% 2018 29% 108% 237 Expedia's Intangible Assets are greater than those of Booking based on the following metric: 238 239 240 Returns 241 As detailed previously, Expedia made numerous sizable acquisitions in the past decade, including the acquisition of two major competitors, Orbitz and Travelocity. 242 Post acquisition, Expedia maintained these separate businesses and therefore retained the significant fixed cost of operating multiple, disjointed platforms. 243 As we will discuss in Valuing M&A (Workbook 12), companies seek to offset 'acquisition premiums' with 'synergies'. 244 If a company does not operationally combine acquisitions these potential synergies cannot be achieved. 245 In the case of Expedia, each acquisition had its own systems infrastructure. 246 These separate infrastructures were separately branded and had their own unique functionality 247 Expedia could not consolidate the multiple disparate infrastructures to a common platform. 248 In other words, potential cost-based synergies have not been fully realized. 249 250 With contracting margins and poor capital efficiency, Expedia's Return on Equity (ROE) eroded. 251 252 ROE 2007 2008 2009 2010 2011 2012 2013 2014 2015 253 BANG 26% 26% 36% 28% 38% 35% 27% 28% 29% 254 EXPE 6% -106% 11% 15% 20% 12% 9% 16% 14% 255 256 This divergence in performance is also evidenced the companies' respective Earnings per Share (EPS). 257 Booking's EPS have grown at 34% while Expedia's have grown at only 3%. 258 259 EPS 2007 2008 2009 2010 2011 2012 2013 2014 2015 260 BKNG $3.42 $3.74 $9.88 $10.35 $20.63 $27.66 $36.11 $45.67 $49.45 261 EXPE $1.88 $17.60 $4.10 $2.93 $3.41 $2.00 $1.67 $2.99 $5.70 262 263 As a result, since its IPO in 2005 Expedia's stock has underperformed that of Booking by a factor of 60. 264 2007 to 2018 Stock Price Increase 265 BKNG +6,000% 266 EXPE + 100% 2016 22% 5% 2017 21% 2018 46% 6% 7% 2018 2016 $42.65 $1.82 2017 $46.86 $2.42 $83.26 $2.65 CAGR, 07-18 34% 3% CAGR 07-18 24% 14% 17% 62 43 in the online travel agency market, Priceline introduced a 'Name Your Own Price' offering in 1997 that enabled airlines and hotels to market unsold inventory 44 to the highest bidder on a one by one basis, rather than implementing a wholesale reduction in their prices. 45 Priceline was founded in 1997 with a new business model at the low-end of the travel market. 46 47 Revenues and Growth 48 Booking acquires Kayak in Expedia acquires Travelocity and Orbitz 49 2013 Expedia acquires Trivago 50 Revenues (SMM) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 51 BKNG 1,409 1,885 2,338 3,085 4,356 5,261 6,793 8,442 9,224 10,743 12,681 14,527 52 EXPE 2,665 2,937 2,955 3,034 3,449 4,030 4,771 5,763 6,672 8,774 10,060 11,223 53 oww 859 870 738 757 767 779 847 932 54 Booking acquired Open Table TRIP 298 352 485 637 763 945 1,246 1,492 1480 1,556 1,615 55 Total 4,934 5,990 6,384 7,361 9,209 10,833 13,357 16,383 17,388 20,997 24,297 27,365 56 *Market excludes Travelocity a major independent player until 2015 when it was acquired by Expedia. Expedia sells TripAdvisor to shareholders in stock distribution 57 58 Market Share 59 BKNG 29% 31% 37% 42% 47% 49% 51% 52% 53% 51% 52% 53% 60 EXPE 54% 49% 46% 41% 37% 37% 36% 35% 38% 42% 41% 41% 61 Oww 17% 15% 12% 10% 8% 7% 6% 6% TRIP 5% 6% 7% 7% 7% 7% 8% 9% 7% 6% 6% 63 64 Revenue Growth 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 65 BKNG 25% 34% 24% 32% 41% 21% 29% 24% 9% 16% 18% 15% 66 EXPE 19% 10% 1% 3% 14% 17% 18% 21% 16% 31% 15% 12% 67 oww 14% 1% -15% 3% 1% 2% 9% 10% TRIP 18% 38% 31% 20% 24% 32% 20% - 1% 5% 4% 69 Average 20% 15% 7% 19% 22% 15% 20% 22% 15% 16% 13% 10% 70 71 How would you describe the structure of the travel industry? 72 Hint: Examine the market shares above in the context of the definitions in the 'INTRO Strategy' Sheet. 73 74 Pure competition 75 76 Let us analyze the strategic levers presented in the 'INTRO Strategy' Sheet that have strategic implications to this travel industry. 77 Which company appears to have had the first mover advantage? 78 79 80 A second competitive change occurred when an innovative offering was launched in Europe to market hotel rooms from small mom-and-pop and independent boutique hotels. 81 Most of these hotels were too small to own and manage their own websites at the time this online travel marketplace launched. 82 This fostered a boom in demand for independent (non-chain) small and boutique hotels, a heretofore fragmented and underserved market and Disrupted the online travel agencies a second time. 83 Looking at the growth and market share from 2007-2012, which company was the driver of this new competitive change? 84 85 86 From 2007 through 2012 what was happening to market share? 87 00 68 next Workbook, we will discuss market Disruptions in greater detail. Profitability Now let's look at the profitability of the industry and its major competitors. 97 99 102 103 104 105 106 62% 100 190 111 112 113 116 117 118 190 119 27% 12% 49% 279 17% 122 Expedia's profits eroded over time as Booking was able to sustain its superior profitabilit 2008 2009 2010 2018 2007 11% 11% 10% 112 21% 11% 128 As the first mover, Expedia also enjoyed superior profitability coming out of the starting gate 129 How much greater were Expedia's EBITDA Margin in 2007 than Booking? 126 -86% 122 Expedia's profits eroded over time as Booking was able to sustain its superior profitability. 123 124 Net Margin 2007 2008 2009 2010 2011 2012 2013 2014 2015 125 BKNG 11% 10% 21% 17% 24% 27% 28% 29% 28% EXPE 11% 11% 14% 14% 7% 5% 7% 11% 127 128 As the first mover, Expedia also enjoyed superior profitability coming out of the starting gate. 129 How much greater were Expedia's EBITDA Margin in 2007 than Booking? 130 131 132 Across all competitors, the online travel industry achieved strong profitability as a young market taking share as offline bookings moved online. 133 As suggested above, this was because online agencies enjoyed significantly lower cost and higher value than their offline counterparts. 134 Did the online travel industry represent 'value based pricing' or 'cost based pricing'? 135 136 137 in the 1990s, the online travel agency market enjoyed economies of scale. 138 Economics were characterized by: 139 - high fixed to develop and maintain a hotel transaction processing engine 140 - low variable costs per transaction 141 By mid-2000 the industry's barriers to entry dissipated. 142 The benefits of these early infrastructure investments were greatly diminished due to new, lower cost alternatives for transaction processing. 143 144 Which company spent very little on R&D and was still able to gain significant market share? 145 146 147 By 2010 or thereabouts, the travel market faced a competitive onslaught from new comparison shopping engines that created a dramatic increase in price transparency. 148 Metasearch engines crawl the websites of travel agencies and travel service providers to provide rich comparison shopping experiences. 149 These real-time comparison shopping solutions provide comparisons across price, features, availability and quality. 150 Metasearch players make money by collecting referral fees from agencies and service providers and from advertising revenue. 151 Well known players include Kayak (Booking, 2013-present), TripAdvisor (Expedia 2004-2011), Trivago (Expedia 2013-present) and TravelZoo. 152 Metasearch players impact the online travel agency market by: 153 Enabling full, transparent price discovery 154 Commoditizing the service of online travel agencies, making the source of the hotel room or airline ticket indistinguishable and undifferentiated 155 -Undermining the travel website brand value 156 -Challenging the network effect 157 is the advent of these services favorable or unfavorable for online travel websites? 158 159 With low Barriers to Entry, if more players enter the market, is the pricing model more likely to be similar to an Oligopoly or a Competitive market going forward? 160 161 Who might a new entrant be 162 IND 163 164 Liquidity and Cash Flow 165 More often than not, when companies grow revenues, they grow their investment in Non-cash Working Capital year-over-year which reduces Free Cash Flow. 166 For example, a company seeing a 10% growth in revenues may also see a 10% growth in Accounts Receivable and Inventories. 167 And, typically, Accounts Receivable and Inventory are a greater percentage of their revenues than Accounts Payable and other Non-Debt Current Liabilities (excluding Short-term Debt). 168 Therefore, when the company grows, Non-cash Working Capital increases year/year and reduces Cash Flows from Operations and Free Cash Flow. 169 Online travel agencies perform counter to this pattern and see increases in Cash Flows from year/year changes in Non-cash Working Capital. 170 They enjoy a favorable operating cycle. 171 For online travel agents Non-debt Current Liabilities (e.g., Accounts Payable) are a greater percentage of revenues than Non-cash Current Assets (e.g., Accounts Receivable, Inventories). 172 Consumers pay travel agencies up front for rooms and airline tickets, so that sales create little to no Accounts Receivables (to tie up cash). 173 When travel agents act as the merchant of record (more typical for hotels), the travel agent does not pay the supplier until the consumer actually checks out of the hotel room or takes the flight typically a few months later. 174 Thus, the travel agent will have high Accounts Payable. 175 When the companies grow, they actually generate positive cash flows from year/year changes in Non-cash Working Capital. 176 177 Cash Flows from the Year-over-Year Change in Non-cash Working Capital 178 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 179 BNG (24) (16) 63 33 97 110 64 (27) 16 236 293 115 180 EXPE 220 (86) 229 88 232 718 107 549 525 169 639 382 181 182 The online travel agencies Cost of Revenues are associated with transaction processing, rather than the manufacturing of goods. 183 Thus, there is limited investment in Property, Plant & Equipment (PP&E). 184 Both Booking and Expedia enjoy a negative Tangible Capital Invested in Operations (CIO). 185 As a reminder from the Balance Sheet Workbook: 186 Capital Invested in Operations (CIO) = Capital (Debt + Equity) - Excess Cash & Marketable Securities 187 Tangible Capital Invested in Operations (T-CIO) = Capital Invested in Operations (CIO) - Intangible Assets 188 189 Tangible CIO 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 190 BKNG 13% 6% 8% -2% -2% -8% -11% -15% -13% -12% -19% -16% 191 EXPE -61% -41% -54% -24% -41% -53% -47% -49% -56% -39% -34% -28% 192 193 As a review of the analysis we conducted in Balance Sheet (Workbook 5), which of these phrase best explains the negative values for Tangible CIO? 194 195 470 2017 4,915 10,538 2018 5,035 10,112 196 Acquisitions and Intangible Assets 197 Acquisitions have been a major factor in generating growth in the online travel industry. 198 Bookings was created by Priceline's acquisition of Active Hotels and Booking (Booking.com) in 2004 and 2005 respectively. 199 From 2002-2008, Expedia made very few acquisitions. 200 The resulting growth varied dramatically for Expedia and Booking. 201 Booking's revenues grew at a torrid 24% CAGR over the decade through 2018 versus Expedia's 14% revenue CAGR in the same timeframe. 202 However, Expedia has been able to roughly parallel (and slightly surpass) Bookings' Revenues growth from 2015 through major acquisitions. 203 Booking's success came from targeting smaller independent boutique hotels that paid less ('agency model"), the underpenetrated low-end of the market 204 virtually ignored by Expedia, which was focused on the higher margin ('merchant model) Expedia enjoyed by serving major US hotel chains (e.g., Marriott, Hilton). 205 By 2008, Expedia responded to the competitive onslaught with its own acquisitions. 206 By the time Expedia acquired Venere in 2008, Booking had already established itself as a market leader in the rapidly growing European market. 207 To improve its competitiveness, Expedia went on a shopping spree 2013-2015 amassing nearly 'everyone else' including major agencies Travelocity and Orbitz, 208 vacation rental agency HomeAway and metasearch engine Trivago. 209 In particular, Expedia's acquisition of Travelocity and Orbitz in 2015 resulted in the creation of extremely large Intangible Assets. 210 Doubled Expedia's Intangible Assets 211 Added the value of Intangible Assets to Expedia's Balance Sheet as the value on Booking's Balance Sheet 212 213 Intangible Assets ($ millions) 214 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 21S BANG 520 523 743 705 731 2,788 5,661 5,543 4,391 216 EXPE 6,977 4,372 4,427 3,612 3,621 3,837 4,775 5.246 10,787 10,389 217 218 This created a spike in Intangible Assets/Sales for Expedia, which it grew out of over the next four years. 219 Notice that in 2008 Expedia took a charge (Impairment of Goodwill) that reduced Intangible Assets by more than 30%. 220 This size of this Impairment of Intangible Assets represented a full year of Revenues. 221 Such large write-offs of Intangible Assets is not uncommon. 222 223 Intangible Assets/Sales 224 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 225 BKNG 33% 28% 22% 24% 16% 14% 41% 67% 60% 41% 226 EXPE 262% 149% 161% 119% 105% 95% 100% 91% 162% 118% 227 228 The analysis of Expedia's Intangible Assets provides an opportunity to highlight another Data Integrity issue. 229 One must be careful about analyses based on ratios which camouflage what is a common issue that the denominator changes as a result of the changes in the numerator. 230 in the below analysis of Intangible Assets/Capital, the spike in Expedia's Intangible Assets is hidden by the significant increase in Expedia's Capital as a result of its acquisition spree in 2015. 231 232 Intangible Assets/Capital 233 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 234 BANG 40% 48% 34% 32% 22% 13% 32% 46% 37% 26% 235 EXPE 117% 111% 121% 91% 102% 105% 123% 125% 123% 117% 236 237 Expedia's Intangible Assets are greater than those of Booking based on the following metric: 238 220 2017 39% 2018 35% 90% 105% 2017 24% 101% 2018 29% 108% 237 Expedia's Intangible Assets are greater than those of Booking based on the following metric: 238 239 240 Returns 241 As detailed previously, Expedia made numerous sizable acquisitions in the past decade, including the acquisition of two major competitors, Orbitz and Travelocity. 242 Post acquisition, Expedia maintained these separate businesses and therefore retained the significant fixed cost of operating multiple, disjointed platforms. 243 As we will discuss in Valuing M&A (Workbook 12), companies seek to offset 'acquisition premiums' with 'synergies'. 244 If a company does not operationally combine acquisitions these potential synergies cannot be achieved. 245 In the case of Expedia, each acquisition had its own systems infrastructure. 246 These separate infrastructures were separately branded and had their own unique functionality 247 Expedia could not consolidate the multiple disparate infrastructures to a common platform. 248 In other words, potential cost-based synergies have not been fully realized. 249 250 With contracting margins and poor capital efficiency, Expedia's Return on Equity (ROE) eroded. 251 252 ROE 2007 2008 2009 2010 2011 2012 2013 2014 2015 253 BANG 26% 26% 36% 28% 38% 35% 27% 28% 29% 254 EXPE 6% -106% 11% 15% 20% 12% 9% 16% 14% 255 256 This divergence in performance is also evidenced the companies' respective Earnings per Share (EPS). 257 Booking's EPS have grown at 34% while Expedia's have grown at only 3%. 258 259 EPS 2007 2008 2009 2010 2011 2012 2013 2014 2015 260 BKNG $3.42 $3.74 $9.88 $10.35 $20.63 $27.66 $36.11 $45.67 $49.45 261 EXPE $1.88 $17.60 $4.10 $2.93 $3.41 $2.00 $1.67 $2.99 $5.70 262 263 As a result, since its IPO in 2005 Expedia's stock has underperformed that of Booking by a factor of 60. 264 2007 to 2018 Stock Price Increase 265 BKNG +6,000% 266 EXPE + 100% 2016 22% 5% 2017 21% 2018 46% 6% 7% 2018 2016 $42.65 $1.82 2017 $46.86 $2.42 $83.26 $2.65 CAGR, 07-18 34% 3%