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InterActive's Last-Minute Travel Trophy: Hotwire

E-Commerce juggernaut InterActiveCorp. continues putting its money where its mouth is on acquisitions, this time with the purchase of online discount travel site Hotwire.com for $665 million in cash.

Barry Diller, InterActive's chairman, has been on a buying spree that he announced over a year ago as part of the former USA Interactive company's strategy to expand its online travel interests.

Diller's company already owns both Expedia , Hotels.com and several other travel and leisure-related Internet properties.

In addition to doling out $665 million in cash to the owners of Hotwire.com, InterActive will also take on $20 million in options and warrants related to the company.

Hotwire.com's business model of low-cost, last-minute-pricing for airline tickets, hotel rooms and rental cars has made it a rising star in the online travel industry. The site gives airlines and hotels an outlet to sell some of their unsold inventory without undercutting its published prices.

But its success was potentially cutting into InterActive's own travel properties which have no incentive to provide deeply discounted airfares side-by-side on sites where more expensive rates are published.

It has been well-known that Diller and his staff have been actively courting the management at Hotwire.com, which is profitable and was said to be mulling an initial public offering. Hotwire decided to take InterActive's cash instead.

Hotwire, which has only been around a few years, was founded by a group of major airlines and the Texas Pacific Group, an investment firm specializing in the travel market. The site has been able to carve out a niche for itself in what is known as the "opaque" market, which means that an online ticket-buyer will see and choose a specific fare, or rate, without actually knowing the airline he or she will be traveling, until after the ticket is purchased.

The model enables Hotwire to offer discounts of up to 45 percent on airfares, and up to 75 percent on hotel rooms, the company said. In talking up the Hotwire purchase, InterActive pointed to a recent report from Forrester Research that said 19 percent of Web travel bookers buy on price alone, without consideration of individual airline or hotel brands.

In tandem with the announcement that InterActive is buying Hotwire.com, the company also said Erik Blachford, the CEO of Expedia, is being promoted to be in charge of all of InterActive's travel properties.

Published reports claim that Texas Pacific has invested close to $100 million in Hotwire.com, and controls approximately a third of the company's stock. While a group of airlines, which include American Airlines , America West , Continental , Northwest , United and USAirways are said to have invested only $10 million in the venture, but control slightly more than half of the company's stock.

In return for the large amount of stock, the airlines involved are said to have agreed to provide low fares exclusively to the company.

Early indications are that Hotwire.com, based in San Francisco, will operate as an independent company but will gradually be integrated into InterActive's overall online travel strategy.

InterActive says it expects Hotwire to sell close to $700 million worth of travel revenues in 2003, with actual revenues for the company closer to $110 million. The company expects the transaction to close sometime during the fourth quarter of this year.

Diller's purchase of Hotwire.com follows on the heels of a spate of other Internet-related purchases, which have amounted to more than $4 billion in this year, alone. InterActive paid $3.2 billion, earlier this year to acquire complete financial and operational control of Expedia. It also bought LendingTree, the online mortgage service, for $720 million.

The purchase of Hotwire comes after InterActive tried several times to launch a similar discount offering. First it was called PriceMatcher, then rebranded as Bargain Fare, but neither service gained traction with online travel consumers.