American Express GBT Deal Means More Mergers Will Be Coming

The corporate travel ecosystem soon will have a new juggernaut.

As reported last week, American Express Global Business Travel will acquire Hogg Robinson Group’s travel management division, HRG, for up to $575 million (£411 million) American Express Global Business Travelin a cash transaction expected to close in the second quarter, pending shareholder and regulatory approval.

Hogg Robinson Group is selling off its financial technology and software-as-a-service division Fraedom to Visa for $198 million (£141.8 million), as well.

The financial documents defining the deal show the core win for American Express Global Business Travel will be increased scale worldwide. As business travel continues to grow, particularly in Europe and Asia-Pacific, competing on a global scale has taken on new importance.

Higher transaction volume means more commission payments from travel providers, and the combined company will have a sales volume close to online travel giants Priceline Group and Expedia Inc.

This larger scale also brings leverage in negotiations with the travel providers whose products it sells, allowing it to potentially offer cheaper airfares and room rates to its clients.

There is also, interestingly, the rationale that the acquisition will allow American Express Global Business Travel to bring in more small- to medium-sized clients than it does now.

“GBT believes that the Combined Group will represent an enhanced value proposition for companies, enabling new business to be generated from potential customers not currently served by GBT or Hogg Robinson,” states the announcement document. “Small businesses, medium-sized enterprises, and multinational corporations today more than ever require service providers that can offer integrated solutions to complex needs on a global scale.”

When the deal goes through, the combined company will restructure and 6 to 8 percent of its workforce are expected to be fired within the next year. The company will target the corporate, service delivery, commercial, information technology and meetings, groups and events departments for cuts, according to the financial documents.

American Express Global Business Travel has 12,000 employees while HRG has 14,000 (many of these are likely contractors or support staff); even with the workforce reduction, the combined company will easily become the world’s largest travel management company by headcount.

The unsolicited offer was first made in early September, when Hogg Robinson Group was already working to sell Fraedom to Visa.

Going Deeper Into HRG’s Financials

Why was Hogg Robison Group ready to sell?

Its travel management business has become stagnant in recent years as it embarked on a three-year restructuring of its managed travel division. About 640 workers were laid off, nearly a dozen offices were closed, and a quarter of the company’s staff began working remotely.

A look at the company’s recent financial disclosures show a reduction in operating profit from its managed travel operations in Europe and North America. The company’s most recent outlook for 2018 to 2020 only expected a 2 percent compound annual growth rate for its travel management division. The company’s operating profit decreased 11 percent year-over-year in the first half of the 2017 fiscal year.

Hogg Robinson Group’s 2017 annual report shows declines in both client travel activity and client travel spend in recent years.

“Client travel transaction activity declined by 7 percent year-on-year, while client travel spend at constant currency fell by 10 percent,” reads the annual report. “Air travel bookings accounted for 46 percent of all bookings, rail 17 percent and hotel 28 percent, all broadly in line with last year. For the 12-month period, air bookings declined by 6 percent, while rail and hotel were down by 9 percent and 7 percent year-on-year respectively.”

The company’s stock price has hovered around the same level for the last three years, aside from a huge jump Friday when news of this deal broke.

So Much Technology

This is American Express Global Business Travel’s second major purchase, following its acquisition of corporate travel technology company KDS in 2016. KDS’ Neo Travel booking tool was one of the big reasons for the acquisition.

HRG has solid travel technology bonafides, as well, being the first major travel management company to achieve New Distribution Capability level 3 status. Its Hrgtec customer experience division and HRG Online booking tool will allow its new owner to offer more technology products to clients, although American Express Global Business Travel already has similar offerings.

With the KDS integration at a close, the technology team at American Express Global Business Travel has another daunting challenge.

More Consolidation to Come

Consolidation has been a constant trend in corporate travel, and it seems competitors also will look to enhance their competitive position in the market by scaling up.

Players like Egencia, Carlson Wagonlit Travel, and BCD Travel likely will look to compete against this combined giant by increasing in size, although there are few acquisition targets as large as HRG. Expedia’s trouble in the online travel market might make it less hungry to acquire another company to pair with Egencia, though.

Perhaps a public travel management company like Australia’s Corporate Travel Management will become a target, or a large leisure group like Flight Centre could sell off its corporate travel division to the highest bidder.

Certares, the private equity group with a stake in American Express Global Business Travel as part of a joint-venture with American Express, also owns part of Travel Leaders Group, North America’s largest leisure agency that has a corporate travel arm of its own. If the HRG deal goes through, Certares’ successful travel industry assets will be more valuable.

There’s also the possibility that increased workforce and integration challenges could hamper American Express Global Business Travel’s competitive position despite its industry lead in transaction volume. Its competitors could hunker down with a focus on organic growth, spending on acquiring new customers and building better products instead of attempting to compete on scale.

Whatever comes next, American Express Global Business Travel will claim the preeminent position among travel management companies if this deal goes through.