Does Selling Out to Avis Represent Success for ZipCar? Failure? Something Else?

ZipCar's business model has been heralded as a game changer, potentially disrupting car sales and traditional car rentals alike. So what does it mean now that ZipCar has been purchased by a traditional rental car company?

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ZipCar is by far the world’s largest car-sharing company. It has 760,000 members—up from just 50,000 half a dozen years ago—and leads what some expect to be a $10 billion market down the road. The business model has been heralded as a game changer, potentially disrupting car sales and traditional car rentals alike. So what does it mean now that ZipCar has been purchased by a traditional rental car company?

In 2006, Scott Griffith, CEO of the upstart (and still largely unknown) car-sharing service ZipCar told TIME the following:

“After growing up in Pittsburgh in the 80s watching the decline of the steel industry, I never wanted to be at the twilight of a company,” he says. “I’m interested in creating new categories and shifting industry in some way.”

Indeed, ZipCar not only became the main player in the new business category of car sharing—rentals generally with hourly (rather than daily or weekly) rates, and only for members who pay an annual fee—but has arguably been the leading member of what might be called the national rental movement. It’s this movement in which consumers—younger ones especially—have eschewed the purchase of homes, fashion, tech, and, yes, automobiles in favor of sharing, borrowing, or renting them whenever the need arises, usually with the help of the Internet. Why be tied down to the cost and commitment of ownership, after all, when an occasional rental will do?

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In light of Griffith’s above quote, as well as ZipCar’s reputation as a forward-looking operation in general, it may seem odd that the company would join forces with one that fits smack in the center of a decidedly old-fashioned business category—the very industry that ZipCar once seemed poised to disrupt and shift.

On Wednesday, Avis Budget announced that it was acquiring ZipCar for $12.25 per share—a deal worth nearly $500 million. Naturally, all involved parties celebrated the occasion with the obligatory upbeat quotes. In the official statement, for instance, ZipCar’s Griffith said he was “delighted to announce our intention to join the Avis Budget Group family of companies,” and that combining with the large car-rental operation represented “a win across the board for our members, shareholders, and employees.”

But what does the deal really mean for the companies involved and for the customers who have become huge fans of ZipCar over the years? Let’s take a closer look.

Good for ZipCar, Avis, or Both?
With the acquisition, Avis Budget paid a premium of nearly 50% on ZipCar’s most recent stock price. On the surface, this sounds as if ZipCar is scoring big time. Yet even after it surpassed the $12 mark, ZipCar’s stock price is far below fairly recent highs. The company went public in April 2011 at $18 per share, promptly topped $30, and stood at over $20 in November 2011. As Fortune’s Dan Primack pointed out, at the end of Zipcar’s first day of trading as a public company, it was worth $1.1 billion—more than double what Avis Budget paid a year and a half later.

(MORE: So What’s Car Sharing Really Like for Members?)

For nearly all of 2012, though, shares of ZipCar were trading for under $15—and under $10 since August. The company’s flailing stock price reflected ZipCar’s larger struggles. It had lost $55 million since 2007, never once turning a profit, though it was expected to make at least a few million last year. More importantly, ZipCar simply couldn’t attract more members quickly enough to expand and make the business more viable, according to the Wall Street Journal.

While opinion on the wisdom of this deal is divided, plenty of observers think that many of ZipCar’s problems will (or should) go away now that Avis Budget is taking over, and that ZipCar will (or should) get far more quickly to where it had always wanted to be as a business. A Seeking Alpha post noted that ZipCar “should be able to obtain more favorable pricing from service providers, car manufacturers, and insurance companies” now that it is part of a larger company—with larger negotiating powers. It wouldn’t be too difficult either for ZipCar to enter a rapid growth phase, with its car-sharing services popping up at airports and other rental lots already run under the Avis Budget brand. What’s more, the two operations may be able to share inventories, which would come in handy considering that Avis Budget’s slow period for rentals (weekends) coincides with ZipCar’s busiest time.

As for what the Avis Budget Group gets out of the deal, the company stated that it expects to pocket $50 to $70 million in “annual synergies” through the purchase of ZipCar. Avis Budget CEO Ronald L. Nelson, who admitted in a conference call to being “somewhat dismissive of car sharing in the past,” is now going on record saying that car sharing is “highly complementary to traditional car rental” (i.e., not a direct competitor), and that “by combining with Zipcar, we will significantly increase our growth potential.”

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Perhaps surprisingly, many initial independent reactions to the acquisition of ZipCar basically agree with that assessment. “The pairing of Avis and Zipcar would secure a strong future for both companies,” reads a Wall Street CheatSheet post. “Zipcar was a great idea, but not much of a public company,” is the gist of Wall Street Journal’s assessment. “Sometimes the small, precious thing really is better in larger, if indelicate hands.”

And What About ZipCar Customers?
“Will Avis Destroy ZipCar?” That’s the title of an Atlantic post on the topic. It’s also the overarching concern of many longtime ZipCar members, who have been filling the ZipCar Facebook page with comments like this:

RIP Zipcar. Avis is notorious for its bad customer service, and Zipcar’s customers joined Zipcar in order to get away from being treated badly by companies like Avis. This is a bad, bad decision. Shame on you, Zipcar management.

And this:

Does Zipcar think that they can’t just blind side their loyal customers with news that a horrible rental car company is taking over? I thought the whole point of Zipcar was to give people an alternative to rental cars. Did the higher ups at Zipcar somehow forget that? I get it: dollar signs. Profits over people.

Corporate mergers happen all the time, but in many ways, Avis Budget’s purchasing of ZipCar bears a strong resemblance to another acquisition that got loyal customers up in arms not long ago. During the summer of 2011, Capital One bought the online upstart bank ING Direct, prompting ING Direct customers to freak out due to concerns that the reasons they loved their online bank—no fees, good interest rates, great customer service—would disappear once it was swallowed up by a giant corporation with a reputation for treating consumers poorly. For the most part, however, ING Direct has remained the same since the takeover, and Capital One hasn’t given the old customers good reason to jump ship for another bank. Of course, things could change and new, less-customer-friendly policies could be announced at any moment.

(MORE: The Top 5 Tech Biz Stories of 2012)

It’s hard to say what ZipCar members and would-be customers should expect in the years to come. In all likelihood, the number of ZipCar locations around the globe will grow more rapidly than ever. Everyone should like that. But what about ZipCar’s super easy reservation system, the way rates include gas and insurance, the reasonable hourly rates themselves, and every other policy that drew consumers to use the car-sharing service in the first place? We’ll have to wait and see which, if any of them, are going to change now that old-fashioned Avis Budget is calling the shots.

6 comments
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dkoos
dkoos

One of the few positives that all these articles point to - the "solving the Zipcar weekend rental shortage" argument doesn't actually pan out in reality.  If my usual zipcar isn't available, I have to reserve one a few more blocks away, or pay a little higher hourly rate for a nicer, available car close by, or plan ahead better.  Zipcar joining with Avis doesn't suddenly put Avis-Zipcars on the streets all around me.  It makes the user go to a necessarily-centralized Avis location.  Many if not most zipcar users joined zipcar so that they could walk down the block and pick up a car, not head to the centralized, inconveniently located rental car lot. So this one "positive" that all the articles are touting is mostly non-existent.

JohnDavidDeatherage
JohnDavidDeatherage

Management's job is to MAXIMIZE SHAREHOLDER WEALTH.  The management of Zip Car thinks they can do that by selling the company to Avis.  The management of Avis thinks they can do that by buying Zip Car.  You have two different sets of shareholders and both may benefit from the takeover.  Shareholders are motivated by their economic self interest (Smith's Invisible Hand).

Don't business writers actually study business and finance?

falcon269
falcon269

Excellent for the former owners; pretty bad for the consumer. But then, that is what Wall Street is all about!

SrihariYamanoor
SrihariYamanoor

I looked into it, the damn thing was so expensive. No wonder they never turned a profit. I thought I was being cheap, guess more people agreed with me than not. Price your services right, otherwise lose customers - should be a lesson to every internet bubble 3.0 company out there with a low $19.99 mo pricing for something that is insanely useless! 

AngeloDelPriore
AngeloDelPriore

Given Avis CEO's past comments about car sharing and the chasm in corporate cultures between Avis and Zip, while this deal makes sense on paper, it'll destroy, not add, to shareholder value. Numerous studies (McKinsey, Deloitte and academic) prove that most mergers don't create value. In less than a year, Zipsters will be asked if they want addditional insurance, car seats, all the while suffering from poor customer service and long lines. Hopefully it'll work but I doubt it.

Angelo Del Priore