Merge Mania

After “flirting” for a few years and in earnest the past four months, New York-based Tzell Travel Group and Minneapolis-based Travel Acquisitions Group (TAG, formerly Carlson Leisure Group) are merging. They’re among the many agencies and agency groups seeking new and creative ways to expand, gain market share, cut costs, improve productivity and develop more clout with suppliers. Those elements are crucial to an agency’s success, but particularly so in a tough economy.

The massive Tzell-TAG fusion will create North America’s 10th largest travel company with about $2 billion in directly controlled sales and an additional 5 billion in franchise sales. TAG currently has 1,700 franchise- and company-owned locations, while Tzell, the nation’s fourth largest corporate travel agency, has offices in 15 states and Canada and will continue to operate as a separate business unit. Both Tzell and TAG say it’s business as usual.

Tzell’s Barry Liben will handle day-to-day operations as TAG and Tzell’s CEO. Michael Batt, TAG founder, will continue as TAG chairman. One of TAG’s major businesses, Carlson Wagonlit Travel Associates, also based in Minneapolis and run by Roger E. Block, CTC, was re-branded in late August as Travel Leaders. Other TAG groups include Connexions Loyalty Travel Solutions, also based in Minneapolis, and ProQuest Travel Group, based in Holland, MI.

Why this merger and why now? “You just look at increased size and increased scale, and the ability to do more and [the benefits to] your constituent members,” says Batt. “You look at the increased expertise and the cost efficiencies. We’re a lot stronger being associated with them. It made so much more sense for everyone. The logic was compelling.” Liben, tapped to run the day-to-day operations of the new entity, says the merger delivers “significant abilities to decrease costs and significant abilities to raise revenues.”

The Changing Landscape

On the same day as the Tzell-TAG merger was announced, New York-based Altour—with 19 offices, 700 employees and $500 million in annual sales—also said it had acquired Cherry Creek Travel, a Denver agency founded in 1960. Nancy Calkins, Cherry Creek’s general manager, who has been with the agency for 18 years, will continue to manage the business and work with Altour to expand the agency’s presence in the Denver market.

Given the challenging economy and the benefits of a merger or acquisition, it’s logical that others might follow suit. Browsing an Internet broker site, Travel Agent viewed listings for several small to moderately sized travel agencies up for sale in Springfield, MO; Denver; and Fort Smith, AR, with pricing from $82,500 to $200,000.

“We are getting some concerns about the economy as it affects travel,” says William A. Maloney, CTC, ASTA’s executive vice president and COO. He says the West Coast is concerned about Hawaii, off 15 to 20 percent in summer sales, while East Coast agents report a lack of business for vacations and tours in the usually strong markets of Ireland, the UK, France and Italy. “Agencies are trying to figure out what to do and how to adjust and cope,” Maloney says.

Bob Sweeney, president, Innovative Travel Acquisitions, Inc., Alpharetta, GA, a brokerage firm specializing in travel industry entity sales and acquisitions, acknowledges that “some folks are feeling squeezed this year. I would say there are more people who are realizing that the margin erosion of this business is grinding on them.” That said, “We see mergers and acquisitions all the time,” notes Maloney. “You don’t go from 37,000 agencies to 18,900 [over a period of years] without mergers and acquisitions.” He says ASTA is asked for advice on the subject all the time.

“While the economy certainly drives things,” Sweeney cites a traditional agency turnover rate of about seven percent annually. He cites the 50s, 60s and 70s ages of today’s agency owners as a prime factor in driving an agency to sell or merge.

Founded in 1991, Sweeney’s firm closed its 500th travel business sale or acquisition in August. It typically finalizes 24 to 36 merger and acquisition deals annually; that was the case even after 9/11. This year, Sweeney believes 700 or so agencies of an estimated 10,000 full-service, traditional agencies nationwide will merge or be acquired.

Learning the Lingo

While a merger is the complete legal and economic combination of two separate businesses to form a new entity, an acquisition occurs when one company purchases the assets of another but generally doesn’t assume liabilities. Many agencies choose to combine operations through a purchase of assets, notes Maloney. Why? You don’t have to buy or sell everything. You might sell your database of clients, but not your office equipment. The purchasing agency might hire your staff but not assume your building lease.

Mid-summer, Piedmont Travel in Greenville, SC, was acquired by Carlson Wagonlit Travel. Employee jobs were preserved, and while some staffers were initially concerned about the decision, former owner John Townes says the business is chugging along. He and his brother Scott have employment contracts, and will stay on to help the business grow and transition.

Their father founded the business in the 1970s. At its height, pre-9/11, the agency did $60 million in business, primarily corporate, and employed 80 people. “We focused on doing corporate business with companies headquartered in our market and we rode that growth,” says Townes. Ultimately, the decision to sell was not an economic factor, but more a timing and strategic factor. “Eight to 10 years ago, we were big enough but we’ve felt that the last three to five years, we weren’t big enough,” says Townes.

Twenty-eight years ago Agnes Warburton began working at Travel People in New York City’s West Village; 17 years ago Warburton and business partner Linda Fiedler bought that agency. “About six years ago we started looking around for a bigger agency [to join with] as we were looking for better commissions.” She says they interviewed three or four agencies, Protravel International Inc. being one. Both Agnes and Linda liked Priscilla Alexander but felt the timing wasn’t right to merge.

“We were doing well until about a year ago when age and illness took a toll on the agency, and my partner and I agreed to close down the agency at the end of 2008,” says Warburton. A deal was inked with Protravel; Warburton and another employee, Joanne Shebes, moved to a new Protravel location at 515 Madison Ave; and ProTravel hired a third person to complete the team. “Financially, we all can come out ahead of the game, providing there are no major disasters,” says Warburton. “I think the decision we made came at the right time and I am hoping that it will be a long running relationship.”

Scott Koepf, CTC, NACTA’s president, sees additional mergers, consolidations and buy-outs on the horizon: “While they’re [the companies] not necessarily going on a buying spree, we’ll see relatively large agencies being swallowed by bigger conglomerates.” But Koepf also says there previously were even more mergers. As the host agency concept has emerged, there is less need for small agencies to change ownership. They can simply affiliate with a host. Often no press release is issued, so the transaction is largely off the media radar.

Gary Fee, president of OSSN isn’t seeing mergers within the home-based agency community: “Fortunately, they have low overhead, which puts them in a better position to weather the economic down turn. What we have seen are a few closures, but not many.”

A luxury seller, Cary Haskin, owner, Cary on Travel, in the San Francisco Bay area, is a prime example. “I really don’t see where a merger—as such—would be a benefit to me,” he says. “As a home-based agent with an excellent host agency, I have virtually all the technical and research support I need.” If Haskin’s business grows, he’d likely just take on a like-minded employee or associate.

What’s Best for Your Business?

If you’re considering a fusion with another business, consult with your attorney, accountant and a reputable business broker before beginning any merger or acquisition discussions. Be discreet. Require a confidentiality agreement from all parties.

Why hire a broker? A broker offers both expertise and negotiating experience. Any time a human tries to do something for the first time, he or she isn’t going to be good at it, says Sweeney. “I’ve never booked a trip on my life on GDS,” he explains. “A travel agency owner trying to sell his or her own agency is akin to me trying to book a multi-leg around the world itinerary. I wouldn’t get past the Atlanta airport.” Small agencies pay Sweeney’s firm a minimum flat fee with a three to nine percent sliding scale used for larger transactions, depending on business value. For a $4-5 million agency, you’d pay nine percent commission, or if the business was exceptionally valuable, perhaps eight percent.

If you’re considering a merger or acquisition, check out the member site area of www.asta.org. Maloney points to a full financial assessment tool there now. The site also offers basic information about mergers and acquisitions, including steps to take and what to include in a contract.
Acquisitions typically offer a bit more flexibility than mergers, which Sweeney equates to a marriage; half are likely to succeed, the other half to fail. If a deal is poorly conceived, you might incur unnecessary costs, see a revenue dip, or even ruin your business—often resulting from conflicts in corporate culture or partners who don’t like each other.

Soft issues rule. “When we looked at this deal the most important thing is the human element, as we really liked the people that ran TAG,” stresses Liben. “If that’s not good, the rest of the deal won’t work.” Similarly, Warburton says she and Priscilla Alexander already knew each other so it was an easy transition.

Personal Decision

Although mergers and acquisitions can be beneficial to agents and agencies, they may not be right for all. “Personally, it’s not an option for me right now, as things are holding steady,” says Michelle Duncan, president and CEO, Odyssey Travel Inc., Centreville, VA. “However, if down the road, basic costs of the business were increasing, I would not have a problem looking into a merger situation. Something like that would afford the owners the opportunity to share costs across the board and increase revenues to benefit the bottom line.” But she says she’d insist partners share equally with no majority shareholder.

Timing is everything, says Sweeney. Often, he says, a capable buyer approaches an agency owner, the owner “plays cutesy” with the process, nothing happens, and no other offers materialize. “The risk of selling your business a little too early pales in comparison with trying to sell your business too late,” he stresses. Agency owners must consider what’s actually for sale—most often the relationship between your agents and your clients, he says: “Not many banks are going to write checks for that, as it can go away very quickly.”

From Townes’ point of view, it was a very tough decision to sell a second-generation family business, but it was definitely a good business decision. “Sometimes, though, people view the sale of their business as a defeat, and really it’s just the opposite,” stresses Sweeney. “It’s time to pop the cork on the champagne!”