Vacation rentals are privately owned residential properties that property owners and managers rent to travelers on a nightly, weekly, or monthly basis. According to a study by PhoCusWright, the market for vacation rentals in the U.S. stood at $23 billion in 2012, lower than its levels prior to the recession. However, the share of online sales in vacation rentals doubled from 12% in 2007 to 24% in 2012, and this is expected to increase to 30% by 2014. 
The growing market for online vacation renting has fueled the rise of many start-ups. One such company, HomeAway, was founded in 2004. It brings together travelers and vacation property owners on a single platform via its website. The company generated $54 million in revenues in 2007. The figure increased over fivefold to $280 million in 2012, making HomeAway the world’s largest online marketplace for vacation renting. 
HomeAway caters to about 15% of the U.S. and European vacation rental bookings market. Analysts estimate that the company will double its revenue to $560 million by 2016. HomeAway’s diversified geographic presence, formidable inventory, vast user base and steeply rising revenues make it a potential target for acquisition by online travel giants such as Priceline (NASDAQ:PCLN).  We estimate that Priceline had 4.3% share of occupied hotel rooms in 2013 and currently forecast it to cross 4.7% by 2020. This could potentially reach 5% if Priceline decides to acquire HomeAway. Below we analyze how:
1. Strong International Foothold: The acquisition of Booking.com, Agoda and TravelJigsaw has helped Priceline in expanding its international business. While Priceline’s domestic (U.S.) gross bookings have more than doubled since 2007, international gross bookings have increased almost tenfold. Priceline grasped the opportunity in international markets at an early stage which helped it overtake Expedia (NASDAQ:EXPE) as the world’s largest online travel agency by sales in 2010. Similar to Priceline, HomeAway also has a vast international footprint with presence in 171 countries across the globe. We think that significant operational efficiencies could result from Priceline’s acquisition of HomeAway if both the companies share resources in international markets.
2. Huge Inventory: Priceline is strongest in Europe, where its Booking.com brand has over 45% share of bookings made through online travel agencies. Booking.com caters to about 85,000 vacation rental properties across the globe.  By acquiring HomeAway, Priceline would get access to the former’s inventory of more than 750,000 listed vacation rental properties worldwide.
3. Good Penetration In The U.S. Market: Though Priceline overtook Expedia as the world’s OTA by sales in 2010, Expedia still remains the most popular OTA in the U.S. Expedia has 43% share of U.S. gross bookings as compared to Priceline’s 11% market share in 2012.  The U.S. online travel market is growing at the slowest pace compared to other economies such as Europe, Latin America and Asia-Pacific. Nevertheless, with estimated revenues of $151 billion in 2012, the country remains the biggest market in terms of online travel sales and will continue to be so for years to come. 
After gaining traction in the international markets, Priceline is striving to enhance its presence in the U.S. The company recently acquired Kayak, the leading meta-search engine in the country, and also launched the first ad campaign for its Booking.com brand. Given that HomeAway earns over 60% of its revenues from the U.S., Priceline could significantly enhance its penetration in the country’s online travel market with HomeAway’s acquisition. The overlap between the two companies’ U.S. businesses is likely to be less since Priceline caters primarily to hotel properties while HomeAway is more focused on vacation properties.
Financial Implications Of Further Expansion Into Vacation Rentals
Vacation rental properties have fewer units to rent out as compared to hotels, which limits the booking opportunities. Also, such properties have lower average daily rates and greater credit risk than hotel properties. Thus, increasing the percentage of vacation properties in Priceline’s lodging mix could weigh on the company’s gross bookings growth rate as well as the profit margins. Nevertheless, the vacation rentals industry is growing at a fast pace, and acquiring HomeAway will help Priceline to enhance its presence in the space. Notes:
- The Rise of U.S. Online Vacation Rentals, PhoCusWright, October 2013 [↩]
- HomeAway 10-K Report, www.sec.gov, FY 2012 [↩]
- Priceline Seen Circling HomeAway for Listings: Real M&A, Bloomberg, December 2013 [↩]
- Second Public Offering By HomeAway Would Raise $200 Million, Rivaling Its Own IPO, Skift, December 2013 [↩]
- Priceline, Travelocity take steps to increase share, Travel Weekly, February 05, 2013 [↩]
- Online Travel Sales Explode In Latin America, eMarketer, November 20, 2012 [↩]
- Booking.com No Longer Toying With Vacation Rentals, Reaches Historic Milestone, Skift, December 07, 2013 [↩]