April 11, 2003

Hotels.com became part of an e-commerce empire when it accepted a $1.1 billion stock buyout bid Thursday from the Dallas-based company's parent, USA Interactive.

New York-based USA Interactive, led by Internet titan Barry Diller, has spent the last year building an online conglomerate by purchasing the remaining shares of its publicly held units, including another popular travel site, Expedia Inc., and Ticketmaster.

The Hotels.com buyout marks the last step in Mr. Diller's plan to transform USA Interactive, which also owns Richardson-based Match.com, into an Internet giant from what was essentially a media holding company.

"Now USA Interactive is a colossus," said David Litman, chief executive of Hotels.com. "It's equal to eBay, Amazon, Yahoo - anyone that has a chance to really be a huge player in the online commerce field."

The transaction also is a passage for one of Dallas' last holdouts from the dot-com era. Hotels.com's journey from a quasi-independent subsidiary into a wholly owned unit of a larger company mirrors that of Travelocity.com, which gave in to Southlake-based parent Sabre Holdings Corp.'s buyout offer after initial resistance.

USA Interactive first proposed a buyout of Hotels.com shares in June 2002, but no deal was reached then. The price and timing weren't right, Mr. Litman said Thursday.

Now, however, USA Interactive is in a better position, having divested itself of film, TV and cable assets and having bought up its other publicly held Internet units, he said.

Under Thursday's agreement, USA Interactive will exchange 2.4 shares of its own stock for each share of Hotels.com.

Shares of Hotels.com soared $10.20, or more than 19 percent, to $63.50 on Thursday, while USA Interactive shares climbed $1.59 to $26.69.

Hotels.com and USA Interactive's other properties, including Expedia, will operate independently, Mr. Litman said.

"We will continue to pursue a slightly different strategic course from the others, but we'll look for opportunities to cooperate," he said.

The transaction is expected to close by late August. Mr. Litman and Hotels.com president Bob Diener will remain in their positions, USA Interactive said.

Hotels.com has 1,200 employees. Mr. Litman said he didn't foresee any major changes in the company's operations.

Analysts expect the company to consolidate some operations with its fellow operating units eventually, though they said it could be useful to keep the Expedia and Hotels.com brands distinct.

"They'll want to make sure the businesses are complementary and not cannibalizing each other," said Henry Harteveldt, principal analyst at Forrester Research in San Francisco.

For instance, USA Interactive might want to position Expedia as a luxury travel brand and Hotels.com as a budget hotel seller, Mr. Harteveldt said.

Analysts said Hotels.com could also benefit from Expedia's software, though Mr. Litman said there are no plans to share technology.

"We have a fairly efficient process right now, and we'll be making it more efficient over time," Mr. Litman said.

Eventually, USA Interactive will want to consolidate Hotels.com's operations with Expedia, said Bailey Dalton, analyst at C.E. Unterberg, Towbin.

"Over time, it's so obvious," Ms. Dalton said. "You're going to share technology or other resources, but not customers? That wouldn't make sense."

Hotels.com may also have to consider its sales agreement with Travelocity as it decides whether to share resources with Expedia, analysts said. Travelocity said Thursday that it's reviewing the situation.

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