Travel & Hospitality M&A: Who's Buying?
- Which types of buyers represent the predominant M&A players in travel and hospitality
- What the current trends in M&A dynamics mean for tech founders
Current trends in the travel and hospitality (T&H) sector make it an attractive one for investors.
The T&H market is continuing its upward trajectory since rebounding from two or three years of pent-up demand post-pandemic. Thirty-one percent of Americans are more interested in international travel rather than domestic. Travelers are also planning trips in advance again and are projected to spend even more on flights, hotels, and cruises than in previous years.
Another post-Covid tailwind is the normalization of remote work policies, which has allowed remote workers to take more frequent short trips, testing out the digital nomad lifestyle. Short term vacation rentals have been gaining market share from hotels, and the bigger players, like Airbnb, have seen record-breaking revenue. The proliferation of many regional short term rental groups has been a boon for vacation property management software companies, like TravelNet Solutions and LiveRez, in a fragmented space.
In addition, hotels have been investing in property management software to make better data-driven decisions. Hotels have had to increase efficiencies and manage expenses as they face shrinking profit margins from inflation, supply chain issues, increasing labor costs, and higher insurance premiums. Hotels are also seeking labor management point solutions, like Hotel Effectiveness, to manage staff and personalize benefits in an effort to keep valuable employees.
Overall, the leisure travel market is projected to grow at 8.11% CAGR from $804B in 2022 to $1,330B in 2028.
Where is this leading? The combination of a large market opportunity and a high level of fragmentation have created ideal conditions for market consolidation, placing T&H software companies in demand by prospective buyers.
Not all buyers are created equal. Based on our experience advising T&H SaaS founders through M&A/capital raise transactions, here are the dynamics we see from strategic, financial buyers, and hybrid buyers.
Large-scale strategic buyers (usually publicly traded) tend to have defined M&A strategies and can offer higher "strategic" valuations due to potential synergies at scale, making them important participants in a deal process.
One of the interesting trends in the travel and hospitality space is the emergence of large banks as strategic buyers, like JPMorgan Chase and Capital One, who are expanding into travel booking products. Chase traditionally partnered with Expedia to offer travel packages but have now purchased a travel agency, a booking system, and a restaurant review company to essentially become an Online Travel Agency (OTA) themselves.
There is also a host of more traditional public T&H buyers that continue to be acquisitive like Airbnb, Amadeus, Booking Holdings, Expedia, and Sabre to name a few.
For T&H SaaS founders, strategic buyers may not be the most likely investors, however owners of booking systems and smaller OTA’s may find great potential in this avenue.
Private equity firms have staked their claim in the T&H market due to the realization of great returns on T&H companies they’ve invested in.
Some firms have even become vertical software specialists, seeking out opportunities in the various sub-sectors of travel and hospitality (e.g. property management, labor management, and other emerging verticals) and applying their learnings from past wins.
PE firms who operate under this thesis represent an important buyer to include as part of a deal process.
In recent years, a category of buyer who has represented an emerging opportunity for founders has been the private equity-backed strategic.
A PE-backed strategic is a company that a private equity firm has added to their portfolio and to which they apply several types of growth strategies, including growth through acquisition.
Often referred to as a "platform company," it’s common for a PE-backed strategic to augment organic growth strategies by acquiring and integrating other related companies into their platform. This inorganic growth enables them to take advantage of synergies and grow bigger and faster.
What Do T&H Founders Need to Know?
The key takeaway for T&H founders is that running a process in this space is not about rounding up the usual suspects (i.e. large-scale T&H providers and PE firms). Rather, founders will realize a more competitive outcome if they run a broader process that includes out-of-sector strategics and PE-backed strategics.
Generally speaking, the urgency to acquire a limited number of high quality "on-the-market" T&H companies is keeping valuations at a strong level. As a result, founders who are thoughtful about who they include in a process will hardly have a difficult time realizing a premium valuation.