Kayak-SideStep Merge, Ride Ahead Is Rocky

It was only two days ago when I first heard about vertical travel search engine, Kayak, trying to raise over $100 million from private equity investors at a valuation of around $700 million. That didn’t quite make sense, especially since Orbitz, a publicly traded company, commands a market capitalization of mere $753 million, lower than its estimated 2007 sales of $858 million.

Today it became clear what that money was intended for: acquiring rival SideStep for about $200 million. SideStep and Kayak’s current investors, along with some new investors, are ponying up about $196 million, TechCrunch reports. The Wall Street Journal says SideStep will become a subsidiary of Kayak, and the two sites will be maintained and developed separately. Kayak gets SideStep’s travel guides, hotel reviews and a downloadable tool bar.

The two companies, once combined, will be profitable and will have $3.5 billion in transaction volumes. The combined entity will be the fifth -argest online travel operator. The combined company revenues are rumored to be over $85 million. At the rumored $700 million valuation I had heard, the combined company is valued at about eight time sales. What makes them more valuable than say, Expedia and Priceline, which have market caps of $9.2 billion and $4.5 billion respectively, and are valued at 4 times trailing 12-month sales.

Interestingly, the pre-merger Kayak’s traffic seemed to be in a bit of a swoon, according to Hitwise and comScore data. Leaving traffic trends aside, the new Kayak will face the same challenges as its bigger rivals.

Stifel Nicolaus & Co. analyst George Askew today cut his ratings on online travel sites, saying economic weakness and increasing competition will take its toll on the business. If it impacts the big three, then Kayak isn’t going to be immune from the bad news. He cited data that showed U.S. airline passenger counts were down for the first time in a year. Hotel bookings are down as well, and Askew believes that this points to “potentially lower discretionary income for consumers into 2008.”

You buy Askew’s prognosis? Are you planning to curb your enthusiasm for travel?