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The flight search company Skyscanner sold last week to the Chinese online travel company Ctrip for $1.74 billion, becoming one more in a series of European acquisitions made by Asian giants. Earlier this year China's Tencent bought control of Supercell from Finland for $8.6B, Giant Interactive lead a consortium to buy Israel's Playtika for $4.4B, and Japan's Softbank took control of British semiconductor maker ARM.

airplaneChina Eastern Airlines, another Ctrip investment

But as we at Zirra ask whenever a company makes an exit: So, how much is Skyscanner REALLY worth? Was $1.74 billion too much to pay for the Scottish price checking service or was it sold as a sort of generous Black Friday sale?

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Zirra is a startup that has developed AI and machine learning technology to analyze the private tech market. Our technology values Skyscanner at about $800-$900 million with a pre-sale price tag of about $1.4-$1.5 billion in the case the company is sold or go public.

skyscanner's valuation

The acquisition deal caught the market by surprise as at the beginning of this year Skyscanner raised $192 million from Asian investors, the biggest round the company had raised. The company had only had a few small funding rounds previously and the massive round was purported to help Skyscanner grow in east Asia and to release some cash to early shareholders.

Our algorithms tell the same story of surprise: We expected an M&A/IPO deal to happen only within the range of two or three years, although this estimation was done with a middling probability of 50%-60%.

Skyscanner is skyrocketing

These are good times for Skyscanner and after raising almost $200 million it could do whatever it wanted. From the graph below it is evident that the company gained popularity at the expense of older incumbents such as Kayak, Cheap flights, and Expedia. Among the 5 companies compared here, Skyscanner is the only one who is gaining traction besides Airbnb, which still offers lower prices than an average hotel room and is making huge steps towards offering cheap flights. It is quite possible that the rise of Airbnb might be the reason for the consolidation that is going on in the online travel industry, as seen in deals like the acquisition of Kayak by Priceline and a series of acquisitions made by Ctrip. Aside from Skyscanner it also bought this year a slice from Shanghai based China Eastern Airlines and the entirety of India's MakeMyTrip.

skyscanner trends

But the graph below actually tells the whole story. Skyscanner was considered a rapidly growing company but, as the total employee count shown on the graph demonstrates, Skyscanner halted all recruiting since September of this year and much of their growth took place in 2015. The large financial round raised this January wasn't used to hire more people. Moreover, it is quite possible that Skyscanner didn't feel that hiring more employees during the negotiation period was a fair thing to do.
skyscanner LinkedinSkyscanner total employee count, Nov 2014-Nov 2016. Source: LinkedIn

According to Skyscanner, 2015 ended with total revenue of $150 million and a net profit of about $22 million.
Ctrip, which is today by far the largest online travel service in China, is much larger, ending their 2015 with total revenue of $1.7 billion, up 48% on a year-to-year basis, and with a net income of $387 million.

The asymmetry between the two companies rules out any resemblance to the Uber and Didi deal from last summer. In the latter, Uber renounced competing with Didi and pulled out from the country in exchange for a slice of Didi's shares. Uber was the failing giant, reallocating its sources anywhere else in the world. Skyscanner, although well known in the West, is only a small player that recently began operating in China, ceding to the local giant and then being completely acquired by them.

Skyscanner and Ctrip had, in fact, "common friends". Baidu, China's "Google", is a shareholder in Ctrip and a partner of Skyscanner since 2012. The Scottish company partnered with the search giant as a partner for finding international flights. The expansion into China was already a clear strategy for Skyscanner in January when among the investors were also Yahoo Japan and the Malaysian government’s strategic fund, in addition to the fact that Skyscanner had already rented offices in the country.

But why so fast? Why agree to a buyout of $1.7 billion? One reason could be that...it is $1.7 billion. It was a generous offer from Ctrip. As you can see, it is at least $200-$300 million more then the estimated valuation at exit, and add to that the fact that nearly 30% of the company's shares are held by the founders and their family members (they will receive about $500 million together), and you have a deal that no one can refuse.

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