What’s the opposite of the winner’s curse? It seems that the biggest winner of the Hertz (NYSE:HTZ) deal to buy Dollar Thrifty (NYSE:DTG) for $2.6 billion was actually Hertz’s mortal enemy, Avis Budget (NASDAQ:CAR).
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 (ZIP) 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.