No Summer Vacation for Expedia

On June 19, the online travel web site Expedia announced plans to repurchase 117 million of its own shares, or 42 percent of its outstanding stock. The market celebrated by bidding up Expedia stock more than 10 percent.

Today, the company announced that it will decrease its buyback plan by 80 percent, and will instead repurchase just 25 million shares. The reason? The "lack of available financing, on terms satisfactory to the company, as a result of current conditions in the credit market." Expedia's debt would have swelled to $4.07 billion from $500 million in order to finance the buyback.

Investors are understandably perturbed, and Expedia stock is down 10 percent as a result.

But what's really changed since June 19th?

Last week, Federal Reserve chairman Ben Bernanke told members of Congress that, while the subprime mortgage market has deteriorated, "financing activity in the bond and business loan markets has remained fairly brisk.'' He added that borrowing costs remain low by historical standards.

However, Expedia isn't the only one meeting a chilly reception by the fixed income market. Since June 26th, 20 companies have postponed or canceled debt offerings, according to Bloomberg. The extra yield on junk-rated corporate debt has risen 0.85 percentage points to 3.37 percent since Expedia announced its buyback.

Still, perhaps the biggest change for Expedia in just one month is the lack of investor appetite for its overall industry. Last week, its competitor Orbitz priced its shares for an I.P.O. at $15. They dropped 2 percent on their first trading day and are down another 2.3 percent today. In an unfortunate lesson in stock ticker selection, Orbitz shares have so far lived up to its symbol, OWW.

Another competitor, Travelzoo, announced on July 13th that its earnings for 2007 and 2008 would be hurt by added costs from its expansion into France, Tokyo, and Hong Kong. While the company tried to spin it in positive light, investors didn't buy it, and they shaved 4 percent off its share price in response.

As competition has increased in the online travel sector, it's become harder for sites to differentiate from one another based on the deals they offer. Instead, they're focusing efforts on customer service and international expansion, which can come at a high price.

by Megan Barnett

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