Written Case Analysis Vacation Spot.Com 7 Rent-A-Holiday: Negotiation a Trans-Atlantic Merger of Start ups
Following are assignment questions /topics that should be covered in your write up. You don’t need to answer these in a sequential manner. However, your case paper should consider these points and reflect on them in your analysis and recommendations. When analyzing the case please “go back “ to the timeline of the case and state of the internet and capabilities at that time. While this took place a while ago, the case illustrates relevant business issues that are applicable to the analysis and decision-hmaking process of prospective mergers. .
Requirements: 500
Assignment: Written Case Analysis Vacation Spot.Com 7 Rent-A-Holiday: Negotiation a Trans-Atlantic Merger of Start ups
Following are assignment questions /topics that should be covered in your write up. You don’t need to answer these in a sequential manner. However, your case paper should consider these points and reflect on them in your analysis and recommendations. When analyzing the case please “go back “ to the timeline of the case and state of the internet and capabilities at that time. While this took place a while ago, the case illustrates relevant business issues that are applicable to the analysis and decision-hmaking process of prospective mergers. .
Requirements:
Follow case write up guidelines in the syllabus
Please bring a hard copy of your write up to the class with your name on every page including exhibits
Your case paper must be posted to the Case Paper Assignment Page on Blackboard
Your paper must be posted prior to the start of class week 4
Relevant Questions and Topics:
Why are these companies considering a merger ?
Who initiated the dialogue and why ?
What is the value of Vacation Spot .com in 6/99 ? What is the value of Rent – a – Holiday in 6/99 ?
Aside from the investor’s valuation, How would you value these companies ? Can a DCF Corporate Valuation be calculated ?
Compare and contrast the strategy and business models of these companies
What do you see as reasons why the merger talks broke down ?
Should this merger take place , if yes, why, if no why not ?
How would you re-start negotiation ? What share ratio would you recommend ?
If a merger is executed, which executive team should manage the business ?
What are the risks of this transaction ? How would you mitigate these risks ?
Guide:
1. Case papers should address the key issues that pertain to the financial strategy and then make clear recommendations with as much support as possible.
2. Papers should be no more than three double spaced pages (not including exhibits) and include a cover page with your name, the date, the course number, and the title of the assignment (case name).
3. Instructor may provide topics or questions to be addressed on the paper and specific calculations that maybe required. Otherwise, papers should be organized into specific sections. For example : Background, Key Issues, Risk, Recommendations, and Detailed Support for Any Recommendations
9-800-334 REV: APRIL 5, 2004 ________________________________________________________________________________________________________________ Professor Walter Kuemmerle and Dean’s Fellow William J. Coughlin (MBA ‘99) prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. WALTER KUEMMERLE VacationSpot.com & Rent-A-Holiday: Negotiating a Trans-Atlantic Merger of Start-Ups “I can’t believe you asked us to come all the way to Seattle for this,” exclaimed Karim Dhanani, one of the investors in Rent-A-Holiday. “This is not worth our time!” With that, the Rent-A-Holiday negotiating team stormed out of the VacationSpot.com offices, bringing an abrupt end to the one-day merger negotiations. It was April 23, 1999. Rent-A-Holiday (RAH) and VacationSpot.com (VS) were both online travel companies that focused on the independent leisure lodging segment of the travel market (i.e. villas and bed & breakfasts (B&Bs) see Exhibit 1 for a description of the market). Both companies not only focused on the same space, but had started at around the same time (RAH in January 1997, VS in September 1997) in locations half-way around the world from each other: VS was a Seattle, Washington based company and RAH was a Brussels, Belgium-based company. The two companies had known of each other’s existence for about a year before the two sides entered into formal merger negotiations in April 1999. As he stared at the door that had just closed behind Dhanani, Greg Slyngstad, co-founder and COO of VS, looked at Steve Murch, co-founder and CEO of VS. Steve, what in the world just happened? Did I see that right? The negotiations have been going really well; I mean this has been a real love-fest. We have just spent a couple of days discussing each company’s vision and strategy and basically spent the time getting to know each other. Everything was going so smoothly up until the point we broached the subject of valuation. Both of us have recently completed a round of financing and all I did was say that we should use that as a basis for valuation: a 9:1 ratio based on a $27 million valuation for us and a $2 to $3 million valuation for them. It seems very logical but these guys just exploded. Do you think we have reached a point of no return? At the same time Laurent Coppieters, co-founder and co-CEO of RAH looked at Dhanani as they were walking back to their hotel in downtown Seattle and said: Karim, these guys are proposing a valuation of our company that is completely unfair. Rent-a-Holiday is worth more than that. I don’t know where these guys learned to value companies. It’s a pity, though; these two days of face-to-face meetings went well. After we spent all that time looking for fit, I think we really seemed to see many advantages in a merger. I just can’t believe this is falling apart. I guess we’ll be back in Brussels sooner than planned. This document is authorized for use only by Ningchen Xu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.
800-334 VacationSpot.com & Rent-A-Holiday: Negotiating a Trans-Atlantic Merger of Start-Ups 2 As dusk approached on this rainy day in Seattle, both companies were left trying to figure out what had just happened and what each should do next. Both sides were basically in the same quandary. Was this the end of the negotiations or was this a temporary set back? Was this just a cultural misunderstanding or was this a fundamental problem? Was there any common ground possible on the valuation front and how could the negotiations be restarted? There was a plane for Brussels leaving Seattle at noon the next day. “Should we take that plane?” Coppieters wondered. “Or should we give it one more day?” Independent Leisure Lodging: A Fragmented Segment of a Large Market By 1999, leisure travel was a very large market with an estimated worldwide size of over $3 trillion.1 The market comprised anything from air travel and car rentals to hotel reservations and package vacations. Moreover, the market was expected to offer tremendous growth opportunities for internet-based companies (See Exhibit 1). Forrester Research estimated that more than 8 million trips were booked online in 1998 generating over $3.1 billion in revenues. By 2003, Forrester estimated that consumers would book 65.5 million leisure trips online, generating $29.5 billion in revenues.2 Part of that larger market was the independent leisure travel lodging market. This broad market segment included condominiums, homes, ski cabins, chalets, villas, and timeshare property units and was estimated to have generated over $126 billion in revenues in 1998, but was quite fragmented and not well served by the existing reservation networks. The “traditional” channels—such as travel agents and tour planners—poorly covered these types of properties. Information was hard to find primarily because travel agents did not list the properties in any kind of computerized reservation system (CRS). CRS’s, such as Sabre and Worldspan, were built primarily with large travel suppliers (airlines and chain hotels) in mind. Due to the ease of electronic reservation via CRS, consumers and travel agents chose to focus on selling lodging from the larger, less fragmented hotel chains and spent the rest of their time selling airline tickets and car rentals. In addition, the independent leisure lodging segment was poorly marketed. There was no good source for print items on these properties (like brochures) and the owner, property manager, or rental agent was often unsophisticated. Marketing generally consisted of putting an advertisement in the local newspaper in the hopes that customers would see it. This lack of marketing sophistication was often due to the principal motives of the owner: Many independent leisure properties were purchased not as investments but for other reasons, such as weekend get-away destinations for the owners. This led to inconsistent pricing and massive under-utilization of the assets: estimates on average yearly vacancy rates were around 80% for these types of properties. Yet there was considerable consumer appeal for this segment, particularly for the vast baby boomer leisure travel segment. Vacation rentals such as villas and ski condos came with more room, more amenities, and lower cost than any other lodging segment. Americans took 33 million ski trips each year, with over half of the overnight stays using condos or cabins instead of hotels. And business travelers used to the standard fare at chain hotels increasingly found unique getaways such as inns and B&B’s far more enjoyable for their vacation. At the beginning of 1999, there were several companies looking to take advantage of this situation by offering online services for this segment. Steve Murch (HBS ’91), co-founder and CEO of VacationSpot.com, commented on the nature of the online independent leisure lodging market. 1 VacationSpot.com estimate. 2 Source: Forrester Research, Online Leisure Travel Report, September 1998. This document is authorized for use only by Ningchen Xu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.
VacationSpot.com & Rent-A-Holiday: Negotiating a Trans-Atlantic Merger of Start-Ups 800-334 3 There were several sites that addressed the segment, but most of the web sites were similar to online classified advertisements, offering a few lines of text and perhaps a picture. Moreover, most of these sites had relatively unsophisticated search functions and very little marketing support. For example, nearly all the sites allowed you to browse via a simple hierarchy but none let you search by amenities, price, availability, or style. Even fewer web sites offered real-time online reservation capabilities and those that did, like WorldRes, really did not focus on the villa, condo, and B&B segment; they targeted the hotel chains, just like the online travel agents like Travelocity and Expedia did. Given the fragmented and unsophisticated nature of the industry, the founders of both VS and RAH felt that this was a tremendous opportunity for their respective companies. By April 1999 no other player was as far along in their development as VS and RAH. VacationSpot.com History: Growing from Seattle The Genesis of VacationSpot.com: a Honeymoon After graduating from Carnegie Mellon University with a degree in Computer Science, Murch spent three years at Bell Communications Research (Bellcore) working with the large Baby Bells on ISDN research. (See Exhibit 15 for the biographies of VS founders). Bellcore sent Murch to Stanford University for a Masters in Computer Science in 1987. In 1989, Murch left Bellcore and went to HBS, where he spent his summer working at the consulting firm Booz, Allen & Hamilton. After graduating as a Baker Scholar in 1991, while seeing most of his section choose consulting or investment banking jobs, Murch decided to join Microsoft, which was just beginning to ship Windows 3.0. Murch described his decision: While at HBS, I really wanted to start a company. I had worked on a business plan during my second year and had even received funding for it. But in the final lecture of his class, one of the professors gave a lecture that changed my thinking. He suggested that the best thing to do would be to pick an industry you are interested in and work for a moderately sized, rapidly growing company. From there you learn the ropes of your industry and eventually move on. The industry in which I was interested was this new phenomenon called interactive software and services. In fact, it was not a real industry yet, but I knew from my work at Bellcore that it could be huge. I chose to join Microsoft because at the time, it was a moderately sized rapidly growing company that focused at least somewhat on my industry. Murch joined Microsoft and worked in several positions, including product manager for relational database products such as Microsoft Access and FoxPro, and later, he started the Internet Gaming Zone area within Microsoft. By 1999 this had become the largest games site on the Internet with over 10 million members. Murch had the VacationSpot idea when he was planning his honeymoon with his fiancé to the Tuscany region of Italy in 1996. Murch originally wanted to get a small villa for the trip but was unable to find one available, so he booked a hotel instead. When he arrived in Tuscany, he was shocked to see the high vacancy rates of villas there, so he decided to do some investigating and found the segment to be a great opportunity. During his stint in the Consumer Division at Microsoft, Murch met Slyngstad, who was then head of Expedia (an online travel service that Slyngstad changed from a CD-ROM product into an Internet site) and was formerly Group Program Manager of the Word group. After Murch had written a draft business plan, he turned to the retired Slyngstad for advice on the idea. Murch described his activities: This document is authorized for use only by Ningchen Xu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.
800-334 VacationSpot.com & Rent-A-Holiday: Negotiating a Trans-Atlantic Merger of Start-Ups 4 The motivation of me joining Microsoft was to work with a small team of creative people who was trying to change the world. But over time the percentage of my time spent on doing that stuff decreased dramatically and I began to feel I was working at a really large company. Microsoft is the greatest 30,000+-person company anyone could work for, but it is still a 30,000+-person company. I wanted to start a company and a family but ideally a company first and a family later. That is why I jumped at the VacationSpot opportunity when I discovered it. It seemed like a perfect fit with the Internet: it was large enough to build a nice business but not so large as to attract immediate interest from established firms. Also, a reservation is a perfect virtual product to deliver. After working at Microsoft, I knew that Expedia and online offerings like it did not have enough time or resources to focus on the segment. They had to cater to the airlines and car rental companies and had barely enough time to seek out hotel chains to round out their product offering; there was no time for B&Bs. Yet it was still a $100 billion segment of a $3 trillion market where the average transaction size of $1,500-plus was high enough to make it worth our while. I wrote a pretty bad business plan at Microsoft on nights and weekends, and I sought out Greg, who was the guy who sold Bill Gates on online travel while he was general manager of Expedia. When I asked Greg for his comments he said he had two. His first comment was he thought it was a great opportunity, but would be perfect if I got an online, real-time reservation system in place. His second comment was more of a question: Was I looking for a partner? The Early Years at VacationSpot.com: Acquiring Technology and Property Inventory Murch and Slyngstad started VacationSpot.com in September 1997 with a three-pronged strategy. They wanted to have a comprehensive property offering, a superior reservation technology, and a strong distribution system. After using angel financing and their own money to get things started, they approached Microsoft in April 1998 for their first deal, but it wasn’t for money. “We knew that asking Microsoft for cash would be a lengthy process,” recalled Murch, “so we entered into a long term distribution deal. This gave us a premier position on Expedia in the accommodations segment for two years and lots of banner advertising for a modest amount [20%] of equity that valued us at $3 million pre-money.” The company did raise money from investors with a first round private placement in July 1998 (see Exhibit 2 for VacationSpot.com’s financing history). VacationSpot.com focused on executing its strategy through an aggressive acquisition program and through the execution of several distribution agreements (see Exhibit 3 for a VacationSpot.com timeline of events). VS made a total of three acquisitions over a period of six months in an attempt to address weaknesses in its strategy (see Exhibit 4 for a description of its acquisitions). One of the acquisitions was of a company that developed a Windows-based reservation software product for inns and B&Bs. VacationSpot eventually developed this software into a reservation database management product called Avail that served both the company and customer’s database needs, connecting into the VacationSpot.com site via the Internet to process reservations. “While we started out with paid listings while building out our supply, we are now in a position to effectively take a commission on all transactions,” explained Slyngstad. ”Eventually we will get a full commission [8% of sales] on reservations made through our site and a lower commission [4%] on reservations made off our site as a royalty for use of the database management program.” The other two acquisitions helped the company build its property offerings. “Starting out we felt it was a cheaper way of acquiring properties,” explained Murch. “We figured it would cost us around $300 to acquire a supplier on our own and that the company acquisitions we made to get property This document is authorized for use only by Ningchen Xu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.
VacationSpot.com & Rent-A-Holiday: Negotiating a Trans-Atlantic Merger of Start-Ups 800-334 5 listings would be cheaper.3″ In total, these acquisitions allowed the company to make progress on fulfilling all three elements of its strategy. Slyngstad explained the dynamics of the strategy: Although the initial distribution agreement with Microsoft hurt us with respect to entering into other distribution agreements, all that changed when we got some scale with the acquisitions, especially the first acquisition which was one of the leading vacation rental sites at the time. People like Travelocity simply could not ignore us any longer. Additionally, our acquisitions improved our position with both our “suppliers” [property owners or managers] and potential distribution partners by strengthening all three areas of our strategy.4 Once the technology issue was addressed, we started a virtuous circle where the more properties we signed-up, the more attractive a distribution partner we became and vice versa. VacationSpot.com in April 1999 By April 1999, the company had completed a second round of financing, raising $7 million at a pre-money valuation of $20 million. Murch recalled the company’s strategy. In our Series B round, we received term sheets from many investors but chose Technology Crossover Ventures [www.tcv.com] and the Madrona Group [www.madronagroup.com] over everyone else. We not only chose them because of their success with companies like CNET, Evite, Ariba, MyPoints [TCV], Amazon.com, and HomeGrocer [Madrona], but because their business approach complemented our strategy. For example, we turned down a term sheet from Kleiner Perkins. KP is awesome at branding and PR, but our ideas on building our business were different from theirs. At the time, Kleiner wanted to spend big money on building a brand fast; that works well when you have a well-established distribution channel and fulfillment nailed. In our space, we needed to build the distribution network, and build the reservation platform; it didn’t exist when we started. It has taken us until now [April 1999] to feel like we have the network in place to be willing to drive branding full-stream. By April 1999, we had a strong group of investors that we worked well with, and got very proactive support from them. The company was still growing its listings and had recently changed its revenue model. In order to slow the burn rate, VS had started operations by charging a flat listing fee but switched to a commission-based system after the Avail 5.0 program was launched in March 1999 and was beginning to migrate its customers to this new model. (See Exhibits 5 and 6 for an overview of the Avail 5.0 system and the VacationSpot.com site.) Under this new revenue system, VacationSpot.com effectively cut out the existing travel agents, charging a fee of around 8% compared to the average travel agent fee of around 10% (see Exhibit 7 for an overview of the traditional vacation property value chain). The company was continuing to add listings and was getting more and more booking inquiries every day (see Exhibit 8 for booking inquiries and property listings over time). While things were going well, the company was becoming somewhat concerned about the quality of the listings and the comprehensiveness of the offering. Murch explained: We really feel that our strategy is falling into place. We feel our distribution agreements and our proprietary software, and our upcoming Web-based reservation platform provide us with an edge over the competition and a way to scale our revenues rapidly with the number of consumers using our network. Although 95% of our transactions are still email request based, 3 At the outset, the RAH team estimated the cost of acquiring each property would be $500. 4 Property owners, agents and the like will be referred to as suppliers throughout this case. This document is authorized for use only by Ningchen Xu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.
800-334 VacationSpot.com & Rent-A-Holiday: Negotiating a Trans-Atlantic Merger of Start-Ups 6 we are beginning to automate the process. Moreover, we believe that our property offerings give us more listings than any other site. The only real area of our strategy that we still need to address is in the comprehensiveness of our listings. We have recently conducted a review of our customer request profile and we have found that we are relatively weak in our European offerings. We could address this by focusing our business development efforts on Europe but this really doesn’t satisfy our needs fast enough. The relationships and an understanding of the customer in the market are key. As a result, we feel that an acquisition would suit us better than a green field effort: it is an easy way to get scale and expertise at the same time. With that in mind, Murch and Slyngstad decided it was time to contact Rent-A-Holiday about a possible merger. Rent-A-Holiday: Growing From Brussels The Genesis of Rent-A-Holiday: Another Honeymoon Peter Ingelbrecht graduated from the University of Gent in Belgium with a degree in economics. (See Exhibit 15 for the biographies of RAH founders). He first worked at Procter & Gamble as a Product Manager for brands such as Always, Ariel (detergent), and Punica (fruit drink). After eight years at P&G, Ingelbrecht enrolled at Stanford Business School from which he graduated in 1995. Although he initially wanted to do a start-up he decided against the idea and returned to Europe to work for The Boston Consulting Group in Brussels, Belgium. Ingelbrecht explained his choice. I really wanted to start my own company, but the debts accumulated from Stanford made that impossible. So I decided to head back to Europe to work for BCG. I felt I needed to be in Europe because I felt I had an edge there and that I did not have one in the United States. I liked BCG because it was strong in consumer products and marketing, areas of interest and strength for me. Moreover, I liked the short, three to four month cases and the strategic nature of the business. I felt this would give me a good base knowledge and flexibility for the future. On his first case, Ingelbrecht worked with Laurent Coppieters, a three-year BCG consultant who had graduated from the Free University of Brussels (ULB) with a commercial engineering degree. They shared their ideas about long term career goals and found they had a mutual interest to start their own company. The two kept in touch over the next couple of years. Ingelbrecht then came up with the idea for RAH after having an experience similar to Murch while on his honeymoon in Spain in 1996. He had originally wanted to book a small villa and after spending a tremendous amount of time searching through the typical sources like agencies and newspapers, he found nothing was free so he booked a hotel instead. When he got to Spain, he was surprised to find there was plenty availability. Ingelbrecht explained what he found: Once I was there I saw at least 20% vacancy right off the bat and determined that this market must not be very efficient. So I visited some of the property managers to find out more about their business…and to find new lodging!..and found that marketing in the segment was very unprofessional, at least in Spain. They only advertised locally and had absolutely no clue about cross-border marketing. At the same time, property owners and tour operators granted substantial commissions to these people. So I knew there was an opportunity. With this new knowledge, Ingelbrecht went to his colleague Coppieters and the two decided in January 1997, to quit their job at BCG and began Rent-A-Holiday. Coppieters explained the move: This document is authorized for use only by Ningchen Xu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.
VacationSpot.com & Rent-A-Holiday: Negotiating a Trans-Atlantic Merger of Start-Ups 800-334 7 We did not have any funding at the time but we knew we had a good idea and we knew it needed our complete attention. So we quit BCG to create a rental company focused on Europe. We wrote a business plan and started in April 1997, with our own funds. The first capital round followed in June 1997. The Early Years at Rent-a-Holiday: Building Property Inventory and Raising Capital Rent-A-Holiday’s strategy was to become a worldwide player by focusing first on Europe. According to the company’s estimates, 90% of vacation rentals in Europe were to other European citizens. Moreover, RAH estimated that about 17% of all overnight stays in Europe were in B&Bs and another 17% were in vacation rentals; the corresponding figures were around 4% for both segments in the United States. By focusing on a “Fortress Europe” strategy, RAH felt that they could build up a solid business while protecting themselves from the threat of competition outside of Europe. The strategy was to be executed both through proprietary inventory development and through acquisitions, similar to VacationSpot.com. However, the RAH business was slightly different from VacationSpot.com in that not only did the entrepreneurs have to convince the suppliers to use their service, but they had to educate them about the Internet as well. Since only 5%-10% of the potential suppliers used the Internet, the company had to rely on more traditional means of communication, like fax machines, telephones, and direct country visits.5 As a result the acquisition of suppliers turned out to be more costly than planned. While RAH had originally budgeted 3 man-years to acquire a certain number of suppliers and listings it eventually took 10 man-years to achieve the target. On the positive side RAH benefited from the fact that many Belgian’s spoke several languages and that there was a considerable multilingual foreign population in Brussels, which was also the location of many administrative offices of the European Union. In comparison to the United States it was fairly easy to hire a workforce with outstanding language skills at a low cost. This multi-lingual and multicultural workforce could effectively build inventory via phone calls or local visits. The added complexity of having an end-user and a supplier that often times spoke different languages also complicated development of the website. As a result of this, RAH focused their technology development efforts on creating a user interface that could switch between seven major European languages6 and help the supplier and the end-user communicate with each other. The founders believed that the development of this translation engine provided RAH with a distinct edge over their competition. Due to low Internet penetration among suppliers, RAH was unable to offer an interactive reservation engine to web visitors. Instead, the company relied on a listing-fee-based revenue model. If a sup
Collepals.com Plagiarism Free Papers
Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.
Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS
Why Hire Collepals.com writers to do your paper?
Quality- We are experienced and have access to ample research materials.
We write plagiarism Free Content
Confidential- We never share or sell your personal information to third parties.
Support-Chat with us today! We are always waiting to answer all your questions.
