Travelocity Will Be Grounded If Wings Are Clipped

"You can't be serious!" The trademark quip of tennis tantrum artist John McEnroe leapt from my lips upon first hearing of travel Goliath Sabre's (NYSE: TSG) plan to buy out Travelocity (Nasdaq: TVLY).

Already a 70 percent stakeholder in the 5-year-old travel site, Sabre launched its official offer of US$23 per remaining share on March 5th.

Much of the ensuing melee has centered on the fairness of that share valuation. But a far more sore issue for me is the very fact of Sabre's hostile bid.

Regardless of purchase price, the buyout would hurt Travelocity more than it could help it.

Controlling Parent

Call me nostalgic, but the purist in me would hate to see yet another holdover from the whimsical Internet boom years absorbed into a stodgy multichannel operation.

Granted, in its March 5th filing with the U.S. Securities and Exchange Commission, Sabre said it would not tinker with Travelocity's direction, management team or brand. Sure it wouldn't.

One filing reads, "We believe that by making Travelocity a wholly owned subsidiary, we will have greater operating flexibility to make Travelocity an integral component of our strategy to focus on serving the traveler and delivering value to suppliers."

As a closely run cog in the massive Sabre machine, Travelocity would lose its agility and could stagnate entirely.

Painful Past

Sabre has tried to play the role of savior, citing Travelocity's rocky performance last year.

Indeed, Travelocity ceded market share to rival Expedia (Nasdaq: EXPE) in 2001. Its share of total gross bookings in the fourth quarter fell to 47 percent from 59 percent in the year-ago fourth quarter, according to Sabre financial advisor Goldman Sachs (NYSE: GS).

Over the course of the year, Travelocity's gross bookings declined 24 percent, from US$833.6 million to $630.2 million, while Expedia's bookings grew 4 percent, from $674 million to $704 million.

But Travelocity is anything but a sinking ship. On the contrary, it is well positioned in the grand slam match raging with Expedia.

Merchant Deals

Travelocity continues to rev up profits through merchant-model relationships with travel suppliers, which allow it to earn higher margins on negotiated deals with wholesalers.

In fact, the company's freshly inked deal with Disney, which includes hotel and vacation packages, has yet to be matched by Expedia.

Since last April, when both Travelocity and Expedia logged their first profitable quarter, the rivals have battled neck-and-neck.

But this is no Microsoft-Netscape shellacking, despite Sabre's attempts to convince the SEC and Travelocity shareholders otherwise. Forty-seven percent market share is not a travesty.

New Niche

What is more, Travelocity is making headway in niche travel markets and specialty vacation packages, areas long considered the domain of offline travel agents.

Prospective travelers can tailor vacations according to their hobbies and interests, and this service will only improve as it matures this year.

Not surprisingly, though, Expedia is keeping pace in these areas.

Conflict of Interests

Sabre spin doctors said that as a wholly owned subsidiary, Travelocity will forge ahead with this and other existing strategies.

But if it is rolled into Sabre's stable of travel software and services, the truth is that Travelocity will be run exclusively for the betterment of the parent as a whole.

In many cases, this goal will be at odds with Travelocity's own best interests.

Streak Impediment

Travelocity advocates argue that Sabre lowballed the company with its US$23 per-share bid in an opportunistic attempt to reap maximum returns from Travelocity's presumed rebound.

Obviously. But what Sabre may not realize is that its imperialistic move could backfire. Bogged down in the machinery of a multibillion-dollar corporation, Travelocity could lose the fiscal autonomy and management dexterity it needs in order to unseat Expedia.

My two cents for Sabre executives: Your 70 percent share of today's Travelocity may be worth more than 100 percent of a Sabre-controlled Travelocity.