Will Expedia Buy This Travel Rival?

The news that the world's largest online travel agent, Expedia , just agreed to power the website of rival Travelocity suggests Travelocity's parent, Sabre Holdings, might be clearing the decks in anticipation of its IPO.

There's no question the online travel agency -- or OTA -- space is a highly competitive business, and while Expedia might be the biggest player, priceline.com's Booking.com gives it a run for the money globally. Indeed, on its second-quarter conference call last month, Expedia said both Booking and its own spinoff TripAdvisor were hurting its performance.

In the case of TripAdvisor, there were fewer commissions paid per click as it moved to metasearch, so revenue and profits from referrals affected Expedia. Add in the declining performance of its Hotwire brand, and the OTA has enough internal issues before you even get to its rivals. As Booking's marketing spending has become more aggressive, the OTA needs to be able to juice its own operations.

Thus the deal for Travelocity gives it some leverage. Actually, a lot of leverage, since the agreement between the two applies only to North America. Sabre will keep hold of the European business for now, which presumably it can also sell if it so chooses. Foremost is that Expedia gets an upper hand in contract negotiations with hotels because it's eliminated a competitor from the market and will be the source of supply for the two. Travelocity merely becomes Expedia's distribution channel. Naturally, that means travelers have fewer options, too.

But the deal works out quite well for Sabre as it marches toward its IPO. It wipes from its balance sheet a lot of the costs associated with the operation and lets Expedia handle the technology aspects of the brand. While there's been no real statement that Sabre is going public anytime soon -- though it has stated its desire to do so in the past -- the speculation is running rampant.

Earlier this year Sabre brought in a new CFO with extensive experience at various financial institutions (the old one moved on to greener pastures at Sabre's private equity owners), and then two weeks ago the company president was abruptly made CEO with the former executive staying on as a director. If it walks like a duck, and talks like a duck... it's a company preparing for a re-introduction to the public markets.

In short, whatever the ultimate outcome, it looks like a win-win deal for everyone involved, including Priceline and the other OTAs. One less competitor means more for them. Yet it also highlights that while brand can be important, it's not everything.

Where Priceline has gained advantage from William Shatner being The Negotiator -- so much so they actually had to resurrect him from the dead after apparently killing him off -- the Traveling Gnome mascot had as much impact on Travelocity's performance as the Pets.com sock puppet did for that tech boom-era bust.

Shares of Expedia have lost nearly a quarter of their value this year and are down 30% from their 52-week high. While the OTA didn't gain any ground because of the news, it's still a low-risk, low-cost step to enhancing its own competitive position.