By Perry Wu
Just last month, eLong (LONG), one of China's fastest growing travel agencies, did its IPO on Nasdaq. With its new cash, eLong can now invest in the resources to compete head-on with other newly listed travel companies such as Ctrip.com (CTRP).
eLong's specific strategy is to concentrate on the Chinese "frequent independent traveler" (FIT) market. Traditionally, many Chinese have gone on vacations as part of a group tour package, cookie-cutted to large segments of the population. But the explosion in consumer choices in China has affected the travel industry as well. Chinese now have a far broader array of choices of when to travel, how long to travel, and with whom to travel. So it is to these consumers that eLong has targeted.
However, with the domestic China airlines, the air ticket market is about as consolidated as possible without being an outright monopoly. Discounting by the domestic airlines is essentially prohibited, so there is little room for travel agencies to maneuver for their customers. eLong's opportunites in the air ticket business are therefore limited.
So along with Ctrip, eLong's opportunities largely lie in the hotel markets. And there is no shortage of opportunity there. Outside of a handful of foreign upscale hotel chains, China's hotel industry is a morass of local, decentralized markets. eLong can clearly add value to consumers by using its large purchasing power to negotiate rates with local, toothless hotel chains eager for steady income.
eLong also has the advantage of a Canadian Chartered Accountant, Derek Palaschuk, formerly CFO of Sohu.com. Derek only recently left Sohu and undoubtedly carries a large reserve (no pun intended) of financial experience at a highly visible Chinese listed company. For the privilege of joining eLong, Derek was granted options to purchase a few hundred thousand eLong shares . These options are now deeply in the money; they now appear to be valued at over US$5 million. With Palaschuk's engineering of eLong's successful IPO, eLong's hiring of Derek has been well worth it.
With all this, eLong comes to the table with the backing of Barry Diller's company IAC. IAC is the holding company for well-known travel websites such as expedia.com and hotels.com. Back in August of this year, IAC made an initial investment of US$58.7 million in eLong, and eLong threw in a warrant giving IAC the rights to acquire majority control of IAC. Now, this week with the IPO behind it, IAC has made its move and acquired a majority stake.
With no other information, you can safely assume that there might be corporate political issues that will naturally arise as a result of IAC's actions. IAC's exercise of its warrant now gives it a slight majority of the equity of eLong, but more importantly, it now has a whopping 96% voting control over eLong. Here you have a China-based company run by Chinese (with the notable exception of Palaschuk), controlled by a board of foreigners from IAC. Let's see how this plays out in the coming months.
About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.