Travel Weekly reported today that Sabre is exploring possible collaboration with G2 SwitchWorks. This is based on a comment made by Sabre CEO Sam Gilliland in response to a question from a Sabre employee on December 12th. Texas Pacific Group one of the private equity companies that purchased Sabre also holds a 20% stake in G2 Switchworks. What does all this mean? This could be a good test on whether the equity buyout truly impacts Sabre's strategic direction. Some pundits have voiced their view that the equity buyout will free up Sabre from the constraints of public ownership allowing the company to innovate. Another camp, looks at the acquisition as a short term cash cow for the new owners, who will likely seek to reduce costs at Sabre while positioning the company for a future sale. Remember that private equity's primary interest is bringing a good return back to its investors. If Sabre does pursue a relationship with G2, this would be a sign that the traditional "not invented here" philosophy is changing. G2 has been struggling to differentiate itself in light of the new GDS/airline agreements. How could the two really work together? If G2 continues to position their solution as an aggregation tool a layer above the GDS it would not be in Sabre's best interest to partner with a company who is essentially eliminating their traditional single source GDS model. On the other hand where the aggregation point lies is not as important as who owns middleware. G2 could benefit if Sabre where to endorse the G2 travel agent point of sale tool and help distribute it to the large Sabre subscriber base. This is an interesting story to watch as we enter the new era of private equity owned GDS.
Tuesday, December 12, 2006
The announcement today that two private equity firms are buying out Sabre is part of a bigger trend. Over the last two years, investors have been putting billions of dollars in private equity firms. Recently private equity has bought out firms with such well known brands as Clear Channel, Readers Digest, Eddie Bauer, Burger King, Hertz, Domino's Pizza and AMC Entertainment. What is behind this trend? There are two camps of thought. The first highlights the benefit of removing a company such as Sabre from public scrutiny where financial details are required to be shared as a publicly traded company. The other view of this trend is a bit more skeptical. One needs to remember that the private equity buyouts are intended to provide a profit for the equity investors. This is often realized when these buyout companies are in turn sold. The first step the equity owners take is to cut expenses at these companies. Often, private equity firms borrow money to buy a company and then keeps on borrowing. The private equity firms can borrow the money in the company's name and then can keep the money themselves. This saddles the company with the debt while the private equity firms continue to siphon money out of these companies. This is all fine and well as long as the company continues to bring in a substantial cash flow, but if things change the heavy debt could be a problem. So which scenario drove the Sabre deal? When private equity offers an acquisition price above the current stock price, companies such as Sabre have no choice but to accept the offer as the short term benefit to shareholders is clear. As with the Blackstone buyout of Travelport and the subsequent purchase of Worldspan the jury is still out on whether this will truly be good for the travel industry. My concern is that with the focus of private equity in cutting costs, the new owners of Sabre, Galileo and Worldspan may decide to eliminate needed R&D and slow the process of moving off legacy mainframe technology to more open systems.
Friday, December 08, 2006
Today's announcement by TRX on the acquisition of Hi-Mark marks a significant step in the area of corporate travel data management. Over the last 6-7 years Hi-Mark has successfully marketed their data management solution to many large corporate buyers. Despite this success, Hi-Mark's position in the market is strongest with second tier TMCs and corporate buyers. By acquiring Hi-Mark, TRX expands their reach to the mid to lower part of the market. TRX's DATATRAX is an extremely robust platform with a price tag only affordable to the high end of the market. With this acquisition TRX not only expands its reach, but eliminates a major competitor. It is clear that corporate travel data management is still a wide open market, particularly as procurement takes a more active role in travel management.
Thursday, December 07, 2006
After years of speculation, today's announcement of the merger between Travelport and Worldspan came as no great shock to anyone in the industry. The only surprising aspect of the deal is the lack of a competitive offer from Amadeus. As far as a fit, Amadeus and Worldspan would have been more complementary. Travelport has been suffering pre and post the Blackstone acquisition from an inability to easily integrate disparate entities and systems such as eBookers, Gulliver's and Galileo. The task of integrating Worldspan and Galileo is huge, and most likely will result in the Worldspan platform and brand fading from the marketplace. The biggest winner in this transaction is Rakesh Gangwal, whose golden parachute from the transaction is substantial. Considering his missteps at both USAir and Worldspan, his multi-million dollar payout seems unjust, but clearly reflects the benefit to Worldspan's stockholders not the industry at large. During his time at the helm at Worldspan, Gangwal saw the errors of his continued support of the "Worldspan inside" strategy with the loss of business from Expedia , Priceline and Orbitz. Worldspan's insistence to "stay the course" in regards to not launching their own online retail brand was a key factor in their demise. With executive compensation not reflecting actual performance, no wonder the traditional players in the industry are unable to anticipate the next wave of technology disruption.