Avis’s smart Zipcar buy

By Felix Salmon
January 2, 2013

What’s the opposite of the winner’s curse? It seems that the biggest winner of the Hertz deal to buy Dollar Thrifty for $2.6 billion was actually Hertz’s mortal enemy, Avis Budget.

Let’s count the ways that the Hertz deal helped Avis: for one thing, it prevented Avis from spending $1.5 billion of its own money for Dollar Thrifty, so that’s a $1.5 billion savings right there. Secondly, it cost Hertz $2.6 billion — way outside Hertz’s comfort zone. (Hertz’s original offer, in 2010, was just $1.2 billion.) Thirdly, it gave Avis all the advantages of consolidation for free: Avis is now competing with just two other big car-rental companies, rather than three. And finally, it freed up Avis to spend $500 million buying Zipcar, which is a much more intelligent and sensible acquisition.

Zipcar is the little company that couldn’t. The model is a very attractive one to consumers, who rent cars by the hour; both gas and insurance are included in the price. But as a business it’s much tougher. When Zipcar launched, gas prices were low, and Zipcar was cheaping out dangerously on insurance. But over time, that changed: gas prices rose, and Zipcar was forced to provide decent insurance coverage when it merged with Flexcar in 2007.

Still, Zipcar was growing fast enough that when it had its IPO in 2011, it had a first-day valuation of $1.2 billion — at the time, just 40% less than the valuation of Avis Budget.

As with many high-flying IPOs, however, Zipcar never fulfilled its promise, and its stock never again saw those heady first-day levels. By the end of 2012, its market capitalization had fallen to $330 million, while Avis Budget’s market cap was $2.1 billion — making an acquisition both easy and obvious. In the past eight months alone, Zipcar stock fell by 40% while Avis stock rose by 60%:

The acquisition solves a number of problems with the Zipcar model. For one thing, it gives Zipcar easy access to the one thing it needs more than anything else: money. The car-rental business is at heart a financing business: you need to be able to finance the acquisition of new cars, efficiently dispose of them once they get too old and too used, and generally make profits by juggling enormous cashflows both coming in and going out. When you’re a small and risky company like Zipcar, that kind of fleet and cash management is much harder than when you’re a giant like Avis Budget.

The other big problem that Zipcar had was that it couldn’t meet demand at weekends: the company’s slogan is “wheels when you want them”, but in practice the cars tended to be sold out at precisely the times that members really wanted them. By merging with Avis, Zipcar gets to offer its members Avis cars when dedicated Zipcars are unavailable.

Meanwhile, from Avis’s point of view, it’s buying the clear leader in what is probably the future of car renting. We’re only at the beginning of a long secular decline in the number of cars owned per household: as America becomes increasingly urban, there’s much less need for households to own a car, or a second car — and it becomes much cheaper to just rent cars by the hour or the day when you need them than it is to own a car outright and just leave it parked and useless for 99% of its life.

What’s more, Zipcar’s insurance snafus notwithstanding, it still has much stronger reputation than either Avis or Budget. People actually like Zipcar, which is more than can be said for any of the big rental companies. It’s vastly easier to rent a car from Zipcar than it is from Budget, and if Budget could just introduce Zipcar’s technology into its existing fleet, that alone would probably be worth the price of the acquisition.

Avis is proving something of a winner at the normally-cursed M&A game: its stock rose when the Hertz-Dollar acquisition was announced, and it rose today, too, on the news that it is buying Zipcar. But if Avis is the winner here, who’s the loser? The big risk in this deal is that while Avis might manage to borrow some of the glow from Zipcar’s halo, the converse will also happen, and Zipcar will end up becoming more like a hated big car-rental company. All of the big rental companies have made some kind of half-hearted attempt to get into the hourly-rentals business, and none of them have gotten much traction; now that Zipcar is part of a much larger parent, it could well suffer the fate of those previous attempts to build rather than buy.

From the point of view of a Zipcar member, then, this deal is worrisome: while it comes with some hope on the weekend-availability front, it also comes with the risk that some of the highly opaque pricing of the classic car-rental business is going to make it into the world of Zipcar. Let’s hope that Avis’s operations people are as smart as its M&A people, and that doesn’t happen.

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Comments
7 comments so far

“By merging with Avis, Zipcar gets to offer its members Avis cars when dedicated Zipcars are unavailable.”

How’s that going to work exactly? You can’t magically put more cars on the existing Zipcar spaces, and the Avis lots are inconvenient for the vast majority.

Posted by absinthe | Report as abusive

“People actually like Zipcar, which is more than can be said for any of the big rental companies.”

I was nodding often while reading this post, until I came to this statement. I use Avis and couldn’t be happier. Granted, I have one of their membership accounts that might provide them incentive to treat me nice, but their service should set the bar for other service companies. I never feel gouged, and a car is always ready for me, and if I don’t like it, they will swap it out. I wish Avis ran airlines and hotels. Or a phone company. The thing I take away from every time I rent a car from Avis is that they care if I am happy. I cannot say that about most large companies I buy things from.

Posted by KenG_CA | Report as abusive

I don’t suppose you could update this article so that one name is used for “Avis Budget” instead of the three you use: “Avis”, “Avis Budget”, and “Budget”. Talk about confusing, especially when reading an article on acquisition, which already involved multiple companies.

Posted by ThomasAn | Report as abusive

Avis better have some significant synergies or expense cuts here, or the main virtue of the deal is as you pointed out — not as expensive as Dollar Thrifty.

Posted by DavidMerkel | Report as abusive

“People actually like Zipcar, which is more than can be said for any of the big rental companies.”

In places like Chicago, there’s competition like I-Go, which is a private non-profit. The cars are not as nice, but they are about 15% less expensive. Watch for non-profits to enter here: customers may not want to own their cars any more, but patrons of co-ops are still fiercely loyal

Posted by loopguy | Report as abusive

DavidMerkel, one possible synergy is that Avis will now have a place to dump their used cars after 3 or 4 years, and ZipCar will have easy access to cars for their fleet, effectively eliminating the profit of a used card broker. They can also share customer account info and IT expenses.

I think Felix is right, this is a much better deal for Avis than buying Dollar Thrifty.

Posted by KenG_CA | Report as abusive

In most markets, Avis has higher demand on weekdays than weekends, due to business travelers. There ought to be an opportunity to improve fleet utilization since ZipCar needs more cars on weekends, assuming that the logistical details can be resolved, such as having cars at airport locations versus non-airport locations.

I am personally more familiar with car2go than ZipCar. Of the 2, ZipCar looks like a far better fit to combine with a traditional car rental business.

Posted by realist50 | Report as abusive
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