It's all about the handheld. That's all I can say about this whopper of a deal announced this morning, Priceline (PCLN) to buy OpenTable (OPEN) for $103. First, let me just say that I have been effusive in praising both companies, because both represent the model I most like, companies based on the modern-day convenience of technology.
Priceline allows you to fly and book hotels at the lowest rates. It is a beloved system and a very cheap stock, in part because Americans, including the analyst community, don't understand it. The stock sells at 20x earnings, despite some of the best growth of any company I follow. It's got a ratings system it bought in May 2013, Kayak, that allows you to see how a hotel or a restaurant is regarded by real users, although it is mainly used for hotels and inns.
I have liked OpenTable because CEO Matt Roberts, a frequent guest of "Mad Money," has designed a product that is a gift to users and customers alike. OpenTable is the de facto restaurant reservation system for the world. Customers love it because before they go out, they can check the menu of a restaurant to see if it suits them, and then they can get a table online at the time of their choice. If they can't, they will go to another restaurant. They will never again show up at a restaurant and be turned down, and if they don't like what's on the menu, they have no excuse.
Restaurateurs love it because the banes of their existences are banished. First, nothing is worse than an a table left open for the night, something I know well at Bar San Miguel, my small-plate restaurant in Brooklyn that doesn't take reservations. You have a deadweight loss, kind of like the deadweight loss that an airline has if it doesn't fill a seat, or a hotel if it doesn't fill a room. That's exactly what Priceline does for those two industries.
Second, I know from Danny Meyer, the noted restaurant guru who wrote Setting the Table, still one of the best business books I have ever read, that OpenTable makes it so you have far fewer cancellations. Danny, who is on the board of Open Table, says one of the reasons he likes the product so much is that people often make reservations but then if they can't make it, they don't cancel. However, if a reservation is made through OpenTable, a person can cancel easily without having the hassle of dealing with a manager who typically is none too happy to learn of the cancellation, which is why the non-patron is so anxious and doesn't cancel on the phone.
Plus, Roberts has data that show that for every dollar in OpenTable fees, restaurateurs generate $43 in revenue. That's a very sweet ratio, and it explains why business is growing at a 28% pace in North America and a 46% pace internationally, with lots of runway, as only 15% of reservations are done online.
OpenTable is the largest network of its kind in the world, with 30,000 restaurants, and that's despite the sluggish worldwide growth in the restaurant industry. Who knows what kind of numbers it can put up if things improve in economies worldwide?
But what's truly exciting about OpenTable is the handheld application. Out of nowhere, 41% of OpenTable's business is done mobile, and that makes a ton of sense, because people are in motion when they are going out. I believe this number can only grow. That makes for a terrific seamless app for Priceline, as you book planes, hotels and now restaurants, all after you looked up what the crowd is saying about each, via Kayak.
There is only one problem with this $2.6 billion deal that has driven OpenTable up 33%, a magnificent 47% gain, one that you aren't likely to get if you own CDs or bonds. Judging by the stock price, which is in excess of the $103 deal price, someone else wants this company. Or maybe multiple someone elses.
The reason? Once again, I have come to the conclusion that the public stock market is mis-valuing the true worth of certain companies relative to other companies. Just as Pilgrim's Pride (PPC) and Tyson Foods (TSN) fought over Hillshire Brands until Tyson pre-emptively paid about twice what the sausage maker was worth before the bidding started, I think it is natural that the likes of Google (GOOGL) comes in and tries to outbid Priceline. Here's why. Google not that long ago bought Zagat, a restaurant ratings service. I believe that the combination of a company that rates restaurants in tandem with a reservation system is a total killer app, and Google certainly has the money to make it happen.
At the same time, a very flush-with-cash Yahoo! (YHOO), after the Alibaba flotation, of which it owns a ton, could also join in the bidding. Why not? It needs to crack into this business with all of its handheld relevance, and OpenTable might be the way to do it.
Now, this deal has also spiked Yelp (YELP), and in some ways that makes no sense at all, as Yelp should have no desire to buy Open Table. That's because it has SeatMe, which it believes to be an OpenTable killer. SeatMe is a cloud-based system that is cheaper and is growing like a weed, threatening OpenTable's almost monopolistic hold on the industry. If anything, Yelp's initiative might have made Roberts more eager to sell OpenTable at this terrific price.
I think the deal just shows that Yelp, which is a company I adore, might be more in the driver's seat than people realize. It's got the best listings, the best model, in that restaurants and many other service businesses pay to have ads next to the Yelpers, the people who write reviews. The reviewers don't cost Yelp anyhing. What a model. I have often thought that Yelp should merge with GrubHub (GRUB), the restaurant delivery system that recently came public to, again, offer a seamless app for checking reviews and then getting food delivered, a pun intended, because GrubHub also goes by the name of Seamless. Then the two of them could merge with Yahoo!, where the chairman of Yelp sits on the board. But Yelp has no desire to sell, and it also works with Eat.24 and Delivery.com, which could also be GrubHub killers.
The bottom line here is that all of these companies, which happen to be heavily shorted by hedge funds, are part of the new world where everything is at your fingertips everywhere you go. All of these companies offer value to you, and all are more valuable than the market thinks they are.