Avis  Budget  &  Zipcar  
 

Mergers,  Acquisitions,  Alliances  &  Corporate  Strategy  
Jaideep  Dhanoa   Julie  Ross   Karan  Seth       February  1,  2013  

............................................................................................................  ROSS......  5   Role  of  the  Corporate  Parent  .................................................  SETH     Page  1   ............................  11   Is  this  a  good  deal  for  the  acquirer?  .........  6   The  Zipcar  Corporate  Advantage   .......  14   PART  3:  AFTER  THE  ACQUISITION  ..............................................................................................................  17   Opinion  on  Integrating  Zipcar  with  the  Avis  Budget  Group  .......................................  3   Avis  Budget  Group  –  Corporate  Strategy  ...............................................................................................................................................  17   Post  Announcement  Integration  between  Zipcar  and  the  Avis  Budget  Group  ....................................................................................................................................................................................................................................  3   Role  of  the  Corporate  Parent  .............................................................................................................................................Table  of  Contents   EXECUTIVE  SUMMARY  ..................................................................................  7   PART  2:  DURING  THE  ACQUISITION  ..................................................................................................  8   Potential  Synergies  ....................................................................................  3   The  Avis  Budget  Corporate  Advantage  ..............................................................................................................................  2   PART  1:  BEFORE  THE  ACQUISITION  .........................  18         13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.............................................................................................................................................................................................................................................................................................  5   Zipcar  –  Overview  &  Comparison  to  Avis  and  Budget  .......  8   Deal  Review  for  Acquirer  and  Target  ..............  4   Zipcar  –  Corporate  Strategy  ...........................................................  17   SOURCES  ......................................................................................................  3   The  Avis  Budget  Group  –  Overview  .........  11   Is  this  a  good  deal  for  the  target?  .........................................................................................................................................................................................................................................  13   Alternative  Structure  of  Deal  ..............................................................................

  and  is  expected  to  be  completed  by  the  second  quarter  of  2013.  the  Avis  Budget  Group  formally  announced  the  acquisition  of  Zipcar  for   $12.     The  purpose  of  this  report  is  to  take  a  look  at  both  the  acquiring  company  (Avis  Budget).  ROSS.  and   the  target  company  (Zipcar)  and  get  an  understanding  of  each  entities  respective  corporate   strategy  and  corporate  advantage.  and  expects  that  the  combination  of  the  two  entities  will  result  in  $50  -­‐  $70   million  in  annual  synergies.  the  report  provides  detail  on  the  value  capture  and   monetary  /  non-­‐monetary  synergies  resulting  from  this  acquisition.EXECUTIVE  SUMMARY   On  January  2.  Next.  and  reviews  the  deals  from   both  the  perspective  of  the  acquirer  and  the  target.  2013.  The  transaction  is   currently  subject  to  approval  by  Zipcar  shareholders  and  other  customary  closing  conditions.  SETH     Page  2   .  Through  this  acquisition.  Finally.       13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  the   Avis  Budget  Group  aims  to  get  a  foot-­‐hold  in  the  car-­‐sharing  space  of  the  overall  automobile   rental  industry.  the  report  concludes  with  an   opinion  on  how  short  and  long-­‐term  integration  between  the  companies.25  per  share  in  an  all  cash  deal  valued  at  approximately  $500  million.

 SETH     Page  3   .  Budget   caters  to  value  conscious  car  rental  segments.   generating  $376  Million  in  revenue  for  the  2011  fiscal  year.  where  there  is  high  level  of  integration   between  the  three  business  units  (i.   and  making  use  of  ancillary  add-­‐ons  to  car  rentals  (from  GPS  equipment.  technical  systems  and  process   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  Worldwide.  a  provider  of  business  and  consumer  services  within  the   real  estate  and  travel  industries.  knowledge  sharing.  Budget  Truck  is  the  smallest  business  within  the  Avis  Budget  Group.     Role  of  the  Corporate  Parent   As  the  corporate  parent.  the  Avis  Budget  Group  is  focused  on  a  variety  of  aspects  for  each  of  its   three  business  units  (with  specific  emphasis  on  Avis  and  Budget  car  rentals  as  the  two  units   make  up  approximately  95%  of  the  group’s  annual  revenue).  we  conclude  that  these  are  businesses  with  core  competencies  in  automobile   short  and  long  term  rentals.  accounting   for  total  revenues  of  $1.  the  group’s  business  model  consists  of  renting  vehicles  for  at  least  a  day’s  use. Avis  Rent  a  Car  System  (commonly  referred  to  Avis)  –  The  Avis  business  unit  is  a  major   player  in  the  global  car  rental  business.  to  vehicle  insurance)   and  promotional  deals  to  drive  customer  revenues  from  both  their  corporate  and  individual   customer  segments.       In  analyzing  the  corporate  strategy  and  business  model  for  both  Avis  and  Budget  car/truck   rental  segments.PART  1:  BEFORE  THE  ACQUISITION   Avis  Budget  Group  –  Corporate  Strategy   The  Avis  Budget  Group  –  Overview   The  Avis  Budget  Group  (referred  to  this  document  as  Avis  Budget)  was  formed  in  2006  through   a  spinoff  of  the  Cendant  Corporation.050  locations  worldwide  (including  airport  operations).e.  Budget  car  rental  locations  are  available   in  approximately  3.7  Billion  in  2011  for  the  Avis  Budget  Group.  Complementing  Avis’s  business  of  premium  rentals.  These  businesses  focus  on  renting  only  four-­‐wheeled  vehicles.  the  Avis  brand  is   available  in  approximately  5.  The  spinoff  of  the  Avis  Budget  Group  consisted  of  (and  to  this   present  day  continues  to  be  made  up  of)  three  main  business  units  that  cover  vehicle  rental   services.  and  is  also  a  major  player  in  brand  in  the   global  car  rental  business. Budget  Rent  a  Car  System  (commonly  referred  to  as  Budget)  –  Budget  is  the  second   largest  business  unit  of  the  Avis  Budget  Group.   Furthermore.  Budget  Truck  is  one  of  the   largest  local  and  one-­‐way  truck  rental  business  targeted  at  individual  consumers  within   the  United  States.8  Billion  in  2011  for  the  Avis  Budget  Group. Budget  Truck  Rental  (commonly  referred  to  as  Budget  Truck)  –  Budget  Truck  is  the  third   and  final  business  unit  that  makes  up  the  Avis  Budget  Group.     3.  The  role  of  the  corporate  parent   here  is  to  act  as  a  coordinator  of  central  services.  Avis  predominantly  caters  to  the  premium   corporate  and  leisure  segments  of  the  travel  industry.200  locations  (including  airport  locations).  These  three  businesses  are:     1.       2.  ROSS.  generating  total   revenues  of  $3.

g.  The   primary  linkages  that  drive  the  corporate  advantage  include:     13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  the   corporate  parent  continuously  looks  for  new  ways  to  grow  revenue  through  its  core   business  (i.  and  Budget  Truck  business  units.     1.  The  corporate  advantage  is  driven  through  key  organization  linkages  across  business   units.  add-­‐ons  to   each  rental  such  as  insurance.  Budget  as  a  brand  targeted  to  value-­‐conscious  travelers).  technology  and  administrative  infrastructure.  which  may  include  prepayment  for  certain  rentals.     The  Avis  Budget  Corporate  Advantage     As  a  consolidated  group.  The  corporate  parent  is  responsible  for  the  major  decisions  that  affect  the  operation   of  each  business  unit.  and  to   reduce  costs  through  process  improvements  and  synergies  across  global  operating  units.  renting  vehicles)  and  through  ancillary  revenue  streams  (i.e.  the  Avis  Budget  Group   continuously  looks  into  optimizing  its  yield  management  and  pricing  management   algorithms  to  improve  profitability  per  rental  day.  the  Avis  Budget  Group  aims  to  grow  profitability  across  the   various  business  segments.  SETH     Page  4   .  systems.  to  grow  market  share  in  the  automobile  rental  industry.  both  Avis  and  Budget  target  different  industry  segments  but  share  the  same   fleet.   product  offerings.  maintenance  facilities.  Budget. Grow  Top  Line  Revenue  –  Across  the  Avis.  or   Satellite  Radio  units).  Finally.  the  group   analyzes  ways  in  which  to  cut  costs  (through  the  use  of  process  improvement  initiatives.e.  the  corporate  parent  needs  to  align  the  different  brand  strategies  (e.  risk  management  and   technology  comes  into  play.       2.  ROSS.  The   role  of  the  corporate  parent  can  be  defined  through  its  core  strategic  initiatives.  the   corporate  parent  must  also  look  to  match  fleet  sizes  at  locations  to  expected  demand  on   a  regular  basis.sharing).  GPS  systems. Optimize  the  Multi-­‐Brand  Strategy  –  Avis  and  Budget  are  two  major  brands  in  the   automobile  rental  industry.   Although  the  two  brands  share  many  back  office  functions  and  administrative   infrastructure. Grow  Profits  –  This  is  where  the  introduction  of  data  analytics.  electronic  toll  collection  systems.       Similar  to  any  major  corporation.  In  short.  to   completely  changing  the  car  rental  model  (such  as  the  car-­‐sharing  model).       3.   or  through  technology  solutions  that  reduce  long  term  variable  costs).  They  maintain  two  separate  brand  identities  and  target  two   very  different  customer  segments  (Avis  is  a  premium  brand  associated  with  corporate   and  upscale  leisure  travelers.  The  corporate  parent  also  needs  to  look  at  different  business   models  for  growing  revenue.  From  a  cost  perspective.  and  maintain  the  necessary  liquidity  to  fund  the  overall  group   operations.  Avis  Budget  has  a  corporate  advantage  in  the  automobile  rental   industry.  especially  through  the  car  rental  business  that  accounts  for  95%  of  the  group’s  annual   revenue.  As  a  car  rental  business.  pricing  systems.  and  marketing  channels)  that  results  in  the  greatest   bottom  line  profit  for  each  business  unit.

  and  to  small.  both  Avis  and   Budget  brands  also  use  licensing  as  a  means  of  generating  royalties  for  the  corporate   parent.  These  systems  focus  on  fleet  planning.  i.  and  credit  card  companies.  SETH     Page  5   .e.   and  customer  service  processes  that  help  keep  the  Avis  Budget  group  competitive  in  the   automobile  rental  industry.   business  mix  with  customer  segment. Marketing  –  Both  Avis  and  Budget  support  their  respective  brands  through  a  variety  of   different  channels  and  campaigns.   online  travel  portals  and  also  share  travel  agents  and  specific  partners  such  as  airlines.  data  processing  and  information  management   systems.   4. Reservation  Methods  –  Both  Avis  and  Budget  brands  leverage  similar  technology  for   making  reservations.  ROSS. Global  Fleet  Management  –  The  Avis  Budget  group  maintains  a  single  fleet  of  vehicles   for  the  Avis  and  Budget  brands  in  countries  where  they  operate  both  brands.   5.     3.  The  key  difference  in  the  Zipcar  business  model  when  compared  to   traditional  car  rental  companies  is  Zipcar’s  focus  on  car-­‐sharing  –  providing  four  wheeled   vehicles  for  rental  on  an  hourly  or  on  a  daily  basis  in  major  metropolitan  areas  and  large   university  towns.  hotel  groups.  online  portals.  or  a  one-­‐off  trip  to  a   furniture  store  such  as  Ikea).  medium  and  large  businesses.  This  includes  partnering  with  other  players  in  the   travel  industry  such  as  airlines.  Zipcar  customers   tend  to  be  urban  residents  looking  for  vehicle  to  help  with  daily/weekly  errands  where  public   transportation  is  ill  suited  (e. Licensing  /  Franchising  –  In  addition  to  running  its  own  rental  operations.  which  are  focused  on   individuals  who  require  a  car  to  meet  corporate  travel  or  vacation  needs).  rental.   Each  of  these  resources  can  determine  the  ability  to  fulfill  a  customer  rental  at  a  given   time. Data  Analytics  –  Across  the  Avis  and  Budget  brands.  mobile  portals.  pricing  decisions.  university  faculty.     2.  weekly  trips  to  the  shopping  center.       Taking  a  further  look  into  Zipcar  and  its  corporate  strategy.  there  is  a  common  link  between   the  worldwide  reservation.  and  can  be  considered  a  major  upstart  within  the   automobile  rental  space.  staff  and  students  where  university   communities  need  to  optimize  public  space.  Both  brands   also  have  their  own  loyalty  programs  targeted  to  individual  and  corporate  customers.   1.  and  where  it  is  inconvenient  or  expensive  for   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  sales  and  marketing  systems.  Zipcar’s  target  customer  segment   are  individuals  that  do  not  have  ready  access  to  a  vehicle  for  specific  needs  within  their  place  of   residence  or  business  (contrast  this  to  the  Avis  and  Budget  car  rentals.  phone  reservation  centers.g.  data  warehousing.           Zipcar  –  Corporate  Strategy   Zipcar  –  Overview  &  Comparison  to  Avis  and  Budget   Zipcar  is  a  pioneer  in  the  car-­‐sharing  network.  yield  management.

  and  renting  history.  Based  on  availability  in  the  rental  area.  This  is   in  contrast  to  Avis  Budget  which  does  not  require  membership  of  customers.  growing  business  that  has  yet  to  realize  the  full  potential  of  its  operating  model  in   the  car-­‐sharing  space  within  the  greater  car  rental  industry.  the  United  Kingdom  and  Spain.       13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  metropolitan.  Zipcar  has  grown  both  organically  and  through  acquisitions.  Zipcar  is  looking  to   grow  both  domestically  in  the  United  States  and  internationally.  preferences.  The  idea  behind   membership  is  to  have  a  dedicated  community  of  ‘Zipsters’  who  have  the  freedom  of  on-­‐ demand  access  to  a  fleet  of  Zipcar  vehicles  at  any  hour  of  the  day.  The  expansion  into  new   markets  is  into  markets  that  can  support  car-­‐sharing  (i.  and  in  any  community  they   may  currently  be  in  (whether  home  or  outside  of  their  place  of  residence/business).  and  capture   market  share  from  traditional  rental  car  companies  and  automotive  dealerships  wishing   to  push  car  ownership  and  leasing  on  residents  within  these  areas.  and  for  local  municipal  agencies  and  small  businesses  where   the  costs  of  maintaining  a  fleet  of  cars  for  business  is  not  ideal. Increasing  Adoption  in  Existing  Markets  –  Zipcar  is  focused  on  major  metropolitan   areas  within  the  United  States.       2.  Streetcar  (United   Kingdom)  in  2010.  and  targeted   marketing  and  promotions  based  on  the  Zipster’s  customer  information.  ROSS.  This  is  in  contrast  to  the   traditional  car  rental  model  where  users  simply  specify  the  size  of  vehicle  needed.  and  as  such  the  company  looks  for  newer  ways  to  enhance  the  customer   experience.     Role  of  the  Corporate  Parent   As  a  small.  There  is  still   untapped  potential  within  these  markets  to  grow  the  car-­‐sharing  concept.  and  Avancar  (Spain)  in  2011.  This  strategy  consists  of:       1.  Past  enhancements  of  the  model  have  included  the  creation  of  ‘Zipvan’.  Zipcar  provides  its  members  the  option  to  choose  the  actual  make  and  brand  of  the   vehicle  they  wish  to  drive.       3.  SETH     Page  6   .  Canada.  Zipcar  is  predominantly  focused  on   the  growth  of  its  existing  business. Expanding  into  New  Markets  –  As  the  concept  of  car-­‐sharing  grows.  acquiring  other   upstart  car-­‐sharing  firms  such  as  Flexcar  (United  States)  in  2007.  To   date.  urban  areas).     Zipcar’s  corporate  strategy  is  focused  on  growing  membership  to  its  car-­‐sharing  network.   Membership  to  the  network  results  in  Zipsters  having  to  only  pay  for  the  actual  use  of  the   vehicle  –  all  other  costs  such  as  gas  for  the  vehicle  and  insurance  during  the  vehicles  use  is   covered  by  the  membership. Growing  the  Relationship  with  Members  –  The  Zipcar  model  is  driven  through  its   membership.  Zipsters  select  a  model  based   on  their  personal  preferences.e.students  to  own  a  car  on  campus.   where  customers  may  rent  a  van  based  on  the  car-­‐sharing  model.       Lastly.  and  on  their  actual  need  for  the  vehicle.  leaving  it  up   to  the  rental  agency  to  decide  which  car  to  rent  based  on  availability  in  the  rental  area.

 Zipcar  does  not  operate  multiple   brands  of  car-­‐sharing  services.4.  Past  examples  of  this  have  included  smart  phone   applications  that  allow  its  members  to  reserve  a  vehicle  in  a  particular  area.  SETH     Page  7   .  Zipcar  will  continually  focus  on  using  technology  to  enhance  the   customer  experience  of  using  Zipcar.  member  services.   fleet  operations  and  financial  systems  (similar  to  other  car  rental  companies).           13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.     The  Zipcar  Corporate  Advantage   One  can  say  that  Zipcar  has  no  corporate  advantage  as  it  is  a  business  that  is  purely  focused  on   the  car-­‐sharing  space  within  urban  and  metropolitan  areas.  and  use   that  application  to  start  the  vehicle  when  it  is  ready  for  use.  In   addition  to  this.  ROSS. Enhancing  Technology  within  its  Car-­‐Sharing  Business  –  Zipcar  maintains  a  fully   integrated  platform  that  centralizes  the  management  of  reservations.  and  acts  a  single  entity  within  the  car  sharing  space.

 the  two  companies  plan  to  improve  their  fleet  utilization  on  weekends.     In  regards  to  cost-­‐savings.  In  fact.  efficient  fleet  and  cash  management  is  much   more  difficult  compared  to  when  one  is  a  large  company  with  scale  and  experience  such  as  Avis   Budget.  a  service  currently  offered  by  Hertz  and  Enterprise.  The  ability  to  offer  this  one-­‐way  airport  rental  service  should  add  to  top  line  sales   revenues.  By  sharing  these  technologies.  efficiently  dispose  of  them  after  expected  (and  unexpected)  wear  and   tear.  a  big  problem  that   Zipcar  had  was  that  it  could  not  meet  demand  over  weekends:  the  company’s  slogan  is  “wheels   when  you  want  them”.  urban   ‘Zipsters’  in  the  case  of  Zipcar  and  traditional  business  and  leisure  car  renters  in  the  case  of  Avis   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.     On  the  revenue  side.   by  leveraging  Avis  Budget’s  airport  locations.  ROSS.  thereby  reducing  lost  sales.  Zipcar  can  offer  its  members  Avis   Budget  cars  when  dedicated  Zipcars  are  unavailable.     Avis  Budget  plans  to  leverage  Zipcar's  technology  to  expand  mobility  solutions  under  the  Avis   and  Budget  brands.  For  a  small  company  like  Zipcar.  and  the  elimination  of  Zipcar’s  public-­‐company  costs.  two  of  Avis  Budget’s   rivals.  Zipcar  and  Avis  Budget  have  access  to  two  distinct  customer  bases:  young.  this  merger  will  enable  Zipcar  to  leverage  Avis  Budget’s  economies  of   scale  and  operational  efficiencies  to  achieve  substantial  savings  in  its  operations.  By  merging  with  Avis  Budget.PART  2:  DURING  THE  ACQUISITION   Potential  Synergies   The  synergies  of  this  acquisition  can  be  grouped  into  cost-­‐savings  synergies  and  revenue   enhancing  synergies.  SETH     Page  8   .  Zipcar  will  also  be  able  to  offer  customers  one-­‐ way  rentals  to  airports.   Avis  Budget  expects  significant  cost  reductions  across  the  management  of  Zipcar’s  fleet  life   cycle  across:     • Procurement  -­‐  lower  vehicle  acquisition  costs  through  volume  discounts  on  purchases   • Maintenance  -­‐  economies  of  scale  allow  more  efficient  maintenance  operations   • Disposition  -­‐  better  operational  management  of  older  vehicle  resale   • Financing  -­‐  lower  financing  costs.  but  in  practice  the  cars  tended  to  be  sold  out  at  precisely  the  times  that   members  really  wanted  them.     Additionally.  and  generally  make  profits  by  managing  enormous  cash  flows  coming  in  and  going  out  of   the  business.  better  operational  management  of  car  financing   • Insurance  -­‐  lower  insurance  rates  through  volume  discounts     The  car-­‐rental  business  is  essentially  a  financing  business:  one  needs  to  be  able  to  finance  the   acquisition  of  new  cars.  Other  cost  savings  are  found  from  the  colocation  of   rental  spaces.  Zipcar  would  represent  Avis  Budget’s  laboratory  where  new  technologies   are  tested  and  experimented.  Specifically.   when  Zipcar’s  fleet  is  constrained  and  Avis  Budget  has  excess  supply.  Additionally.  Avis  Budget  will  be  able  to  save  on   present  and  future  technology  expenses.

 one  can  gain  an   understanding  of  the  market’s  estimated  value  of  total  synergies.     Value  of  Synergies   When  observing  the  market  reaction  to  the  acquisition  announcement.  This  increase  of  $87.000.25  a  share   represented  a  49%  premium.000 Total synergies $ 248MM Avis  Budget  has  said  it  expects  to  generate  $50  to  $70  million  in  ‘annual  synergies’  as  a  result  of   the  deal.21.3MM  reflects  the  market’s   view  of  the  share  of  synergies  captured  by  Avis  Budget.  SETH     Page  9   .Budget.     Market  Value  of  Synergies   Synergies captured by Avis Budget.39  to  $20.e.  This  premium  of   $161MM  reflects  the  market’s  view  of  the  share  of  synergies  captured  by  Zipcar’s  shareholders.     On  the  date  of  the  announcement.  the  breakdown  of  these  synergies  is  as   follows:   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.000. $160.  According  to  estimates  provided  by  Reuters.3MM  increase  in  market  cap.     On  the  same  day.  ROSS.   reflecting  a  $87.   offering  the  ease  and  convenience  of  Zipcar  to  Avis  Budget’s  traditional  user  base  and  vice   versa.000 Zipcar takeover premium.  or  $161MM  more  than  Zipcar’s  market  cap.  Avis  Budget’s  announced  acquisition  price  of  $12.  Avis  Budget’s  share  price  also  saw  a  4%  jump  from  $19.  This  offers  the  potential  to  grow  top-­‐line  revenue  for  both  entities  with  reduced   requirement  for  customer  acquisition  investment. $87.  The  acquisition  provides  the  opportunity  for  cross-­‐selling  to  these  segments  i.     Combining  Zipcar’s  takeover  premium  with  Avis  Budget’s  share  price  appreciation.  one  can  see   the  market  estimate  of  total  synergies  is  $161MM  +  $87MM  =  $248MM.

 However.  the  questions  that  we   would  want  to  ask  would  be  related  to  the  cost  and  benefits  of  the  acquisition  and  the   likelihood  of  a  successful  outcome  i.  if  we  were  in  this  role.  in  general.  according  to   Reuters.  it  is  of   great  importance  that  the  Board  ensures  the  decision  to  acquire  is  made  for  the  right  reasons.     There  are  a  number  of  reasons  why  M&A  occur  which  are  not  based  on  creating  shareholder   value.  Nonetheless.       Research  shows  that.3MM  of   net  income  on  $78.  ROSS.  these  anticipated  synergies.  As  such.   The  Board  has  an  important  role  to  play  in  ensuring  the  M&A  activity  they  are  presiding  over  is   successful.  acquisitions  do  not  positively  contribute  to  an  acquiring  firm’s   performance  and  that  50-­‐80%  of  M&As  are  considered  non-­‐value  creating.  an  outcome  that  increased  the  value  of  the  shareholders   stake  in  the  firm.  could  add  $30  million  after  tax   to  annual  profit     3.2MM  sales.   These  factors  would  improve  Zipcar’s  profitability  substantially.5  percent  net  margin.Managerial  overconfidence   . Expected  cost  savings  due  to  improved  fleet  management  could  net  another  $25  million   of  synergies   Board  Member  Evaluation   The  role  of  members  of  the  Board  of  Directors  of  Avis  Budget  is  to  ensure  that  any  business   decision  that  is  made  is  in  the  best  interests  of  the  shareholders  of  the  firm  i.e.  SETH     Page  10   .e.  with  a  net  present  value  after  tax  of  $175MM.  With  the  synergies  identified  analysts  believe  Zipcar’s  net   margins  could  jump  all  the  way  to  18  percent. Equipping  Avis’s  cars  with  Zipcar  technology  and  making  them  available  on  the  weekend   could  increase  revenue  by  up  to  $25  million  a  year     2.  or  $4.  Reasons  that  are  not  primarily  driven  by  value  creation   include:       • Managerial  biases   .  Last  reported  full  year  data   shows  Zipcar  making  a  loss  (net  income  -­‐$7MM  on  $241MM  sales).Management  unwilling  to  walk  away  from  deal  they  have  significantly  invested  in   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  data  from  Q3   2012  shows  the  company  moving  into  profitability  with  5.  Given  this.  The  Board  must  question  management  adequately  to  ensure  such  reasons  are  not  the   driving  force  behind  the  acquisition.   1.  would  still   exceed  the  $161MM  takeover  premium.  a  good  portion  of  any  benefit  from   sharing  fleets  would  really  belong  to  Avis  Budget’s  existing  business. Adding  one-­‐way  rentals  as  well  as  expanding  Zipcar  locations  could  inject  another  $20   million  to  revenues     Combining  (1)  and  (2).  and  assuming  no  associated  costs.  Of  course.  the  decision   creates  value  for  current  shareholders.

 we  would  ask  the  following  questions  about  the  deal:     1.Top  management  incentivised  to  perform  M&A  as  compensation  linked  to  firm  size     . What  is  the  value  to  Avis?   • What  is  the  NPV  of  the  investment?   • What  synergies  do  we  expect  to  achieve  with  Zipcar  and  how  achievable  are  they?   • What  is  the  time  frame  for  achieving  the  synergies?   • What  markets  does  the  acquisition  let  us  enter  where  we  currently  do  not  have   access  to?   .  Avis  Budget  had  a   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  Avis  Budget  was  facing  a  number  of  critical   issues. Are  we  paying  the  right  price?   • What  is  our  valuation  of  the  synergies  we  can  achieve  with  Zipcar?   • What  is  our  valuation  of  Zipcar  –  is  the  company  currently  overvalued  or   undervalued  by  the  market?   • What  is  our  bidding  strategy?  What  is  our  ‘walk-­‐away’  price?   • Do  we  know  if  other  competitors  are  investigating  Zipcar?   • Have  there  been  other  recent  deals  in  the  industry?  What  was  the  value  of  the   companies  and  what  was  the  winning  bid?   Incentive  conflict   .Investment  bank  compensated  based  on  deal  closes       3.  ROSS. Do  we  believe  we  can  make  this  a  successful  M&A?     • Do  we  believe  in  the  value  proposition  Zipcar  offers?  How  sure  are  we  that  this  will   remain  relevant?   • Do  we  believe  in  Zipcar’s  management  team?   • Where  do  we  expect  future  growth  to  come  from  for     .  particularly  when  considering  their  future  position  in  the  industry.Is  acquisition  the  best  way  to  enter  these  markets?   • What  are  the  characteristics  of  the  market  we  are  hoping  to  gain  entry  to?   • What  competitive  advantage  does  the  acquisition  give  us?   • What  are  our  competitors  doing  in  this  space?   2.e.  waves  of  acquisition  occurring  in  industry       Given  these  considerations.  SETH     Page  11   .   • Social  proof  pressure  i.Avis  Budget   • Is  M&A  the  right  route?  Have  we  considered  organic  growth  or  a  strategic  alliance?   Deal  Review  for  Acquirer  and  Target   Is  this  a  good  deal  for  the  acquirer?   At  the  time  that  the  Zipcar  acquisition  occurred.Zipcar   .

 Avis  Budget  had  to  first  understand  the  resource   gap  that  they  faced  in  updating  their  business  model.  building  brand)  and  some  of  the   capabilities  are  not  easily  imitable  (i.In  contrast.  The  key  resource  gaps  they  were  facing   included:     • Access  to.  building   resources  and  capabilities  internally  was  unlikely  to  be  an  effective  way  to  fill  the  resource  gap   and  the  decision  was  made  to  acquire  Zipcar.  as  car   ownership  started  declining  (particularly  in  urban  locations).  the  target  customer  demographic  for  car-­‐ sharing/short-­‐term  car  rental  services     • Technology  to  allow  more  convenient  and  flexible  short  term  rentals   • Brand  strength  in  the  car-­‐sharing  market     Avis  Budget  could  have  used  a  number  of  different  strategies  to  fill  these  resource  gaps.strong  position  in  the  existing  car  rental  market  and  was  (and  still  is)  active  in  multiple   geographies  across  the  globe.  Additionally.  SETH     Page  12   .       At  the  time  of  the  acquisition.  Hertz.  and  understanding  of.  As  a  result.  Avis  Budget  competitors  had   already  moved  into  the  car-­‐sharing  space  and  speed  of  movement  was  important  to  Avis   Budget  to  prevent  them  being  left  behind  in  the  rush  for  market  share.  growing  market.       To  understand  how  best  to  grow  in  the  future.e.  Enterprise)  had  already  started   moving  into  this  space  and  were  offering  hourly  car-­‐rental  services  to  their  customers.  technology).  however.  Developing  the  capabilities   required  in-­‐house  would  have  taken  significant  time  (i.  car  rental  consumers  were  beginning  to  demand  increasing   flexibility.  Avis  Budget  was  lagging  behind  competitors  in  gaining  a  foothold   in  this  new.e.  The  company  had  a  position  both  in  the  traditional   leisure/commercial  segment  and  the  budget  conscious  segment  of  car  renters.e.  The   first  decision  would  be  whether  to  ‘buy  or  build’  to  fill  the  gaps.  more  convenience  and  more  personalized/individualized  service.  urbanites  and  is  well  recognized  by  this   demographic   .     Upon  analysis.  Avis  is  seen  as  a  ‘dinosaur’  of  the  car  rental  business       13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  ROSS.  there  was  increasing  demand  for   short  term  (less  than  24  hour)  rentals  and  a  change  in  the  demographic  of  those  renting  cars.  This   demographic  is  quite  different  from  Avis  Budget’s  classis  customer  demographics  of  business   travelers  and  holiday  makers.  young  urbanites  were  increasingly  looking  for  alternatives  to  car  ownership.  Additionally.  we  conclude  that  Zipcar  does  fulfil  Avis  Budget’s  needs  in  terms  of  closing  the   resource  gap:     • Zipcar  has  built  a  strong  brand  among  young.  Avis’s  key  competitors  (i.   Thus  at  the  time  of  the  deal.  the   car  rental  industry  was  starting  to  undergo  significant  changes  and  it  was  important  for  Avis   Budget  to  recognize  and  adapt  to  these  changes  to  prevent  becoming  irrelevant  in  the  industry.   Specifically.

    Is  this  a  good  deal  for  the  target?   Zipcar  has  experienced  strong  growth  rates  in  recent  years  (43%  CAGR  over  2007-­‐2011)  and  has   expanded  to  several  major  markets.000  vehicles.  Avis  can  harness  this  technology  to   increase  the  efficiency  of  renting  and  to  improve  the  customer  experience     Based  on  this  assessment  of  Avis  Budget’s  resource  gap  and  Zipcar’s  ability  to  fulfil  the  gap.  Avis  Budget  fleet  comprises  393.       Acquiring  Zipcar  allows  Avis  Budget  to  play  both  an  aggressive  and  a  defensive  move.  wants  and  preferences     Zipcar  have  a  considerable  share  of  the  car-­‐sharing  market  in  USA  and  Europe  and  are   considered  the  leading  player  at  this  time.     .  and  cash  flow.       The  reason  for  the  lack  of  profitability  was  the  capital  required  to  fund  Zipcar’s  recent   aggressive  expansions.g.  Avis   Budget  stands  to  gain  significantly  from  this  deal.  The  business  has  high  fixed  costs  due  to  the  need  to  expand  fleet  ahead   of  entering  new  markets.  SETH     Page  13   .  extending   their  customer  base.  By   establishing  a  dominant  position  in  the  newly  emerging  car-­‐sharing  market.  While  Zipcar  had  been  successful  in  building  their  brand.  while  Zipcar’s  was  at  11.  The   acquisition  would  allow  Zipcar  to  benefit  from  the  significantly  increased  scale  of  the   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  Hertz)  who  have  made  shallow  inroads  into  this  market  and  establish   dominance   Zipcar  has  developed  sophisticated  technology  to  make  car  rental  more  flexible  and   more  convenient  (for  example:  mobile  apps  for  making  and  updating  car  bookings.  As  discussed  earlier.  etc.  Zipcar  was  in  a  relatively  unsustainable  position  and  it   was  unclear  how  it  would  fund  future  growth.  at   the  end  of  2011  they  had  yet  to  achieve  profitability  (they  were  expected  to  achieve   profitability  in  2012).• •   • Zipcar  understands  this  demographic  and  has  used  their  extensive  data  gathering   abilities  to  build  datasets  around  their  membership  base.Avis  does  not  have  access  to  data  on  this  demographic  and  has  little  knowledge  of   their  needs.       Avis  Budget  were  able  to  provide  all  elements  of  this  resource  gap  to  Zipcar   .  Avis  Budget  are   positioning  themselves  well  to  become  a  dominant  player  in  this  market  while  also  allowing   them  to  build  up  business  in  a  new  market  to  maintain  profitability  as  the  traditional  car  rental   market  starts  to  decline.  and  establishing  a  dominant  market  share  position.  the  market’s  reaction   indicates  that  the  acquisition  was  seen  as  a  value  creating  move.  access  to  capital.000.  This  allows  Avis  Budget  to  leapfrog   competitors  (e.   technology  to  remotely  unlock  and  lock  cars.  mostly  through  acquisitions  of  competitors.).  Zipcar’s  resource  gap  was  focused   around  scale.  this  had  come  at  the   detriment  of  cash  flows  and  profitability.As  of  2011.  To  reiterate.  However.  ROSS.

      13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  This   would  have  increased  the  level  of  customer  service  Avis  Budget  was  able  to  offer  and  would   have  improved  some  of  their  flexibility  options.  Zipcar  would  have  been  able  to  licence  the   technology  to  multiple  players  leaving  little  competitive  advantage  for  Avis  Budget  to  leverage.g.  Additionally.  technology.  This  is  a  significant  risk  to  Zipcar.  setting   up  a  strategic  alliance  would  not  have  been  an  optimal  deal  structure  in  this  case.  SETH     Page  14   .  for  Zipcar.  The  acquisition  allows  Zipcar  access  to  these  financing  resources  allowing  investment   in  future  expansion  and  alleviating  cash  flow  concerns.  who  would  face  a   cash-­‐rich  and  powerful  competitor  in  its  market  space.   Avis  Budget  is  a  mature  company  with  stable  cash  flows  and  a  reported  ~$550M  available   cash.  On  the  other  side.       Licencing   Avis  Budget  could  have  licenced  Zipcar’s  technology  and  implemented  it  in  its  own  fleet.  Thus.  Thus.  based  on  coordination  issues.   Avis  Budget  has  an  incentive  to  learn  as  much  as  they  can  from  Zipcar  and  could  then   potentially  go-­‐it-­‐alone  in  the  newly  emerging  car-­‐sharing  market  or  adapt  their  existing   business  model  to  cater  to  this  market.  ROSS.       Strategic  alliance  with  equity  stake   There  are  a  number  of  issues  that  should  be  considered  when  determining  whether  an  alliance   with  equity  stake  is  preferable  to  an  outright  acquisition.  Zipcar  stands  to  benefit  from  scale  benefits   associated  with  procurement  and  from  access  to  Avis  Budget’s  cash  flows.  acquisition  is  the   safer  deal  structure.  However.- merged  entity.  specifically  allowing  them  to  achieve  cost  savings  around  procurement  and   insurance  costs.     • Coordination  –  A  high  degree  of  knowledge  sharing  between  two  companies  and   coordination  of  strategy  is  often  difficult  to  achieve  in  an  alliance  as  there  is  concern  about   excessive  knowledge  sharing  leading  to  power  imbalances  between  the  players.  beyond  this  it  would  not  have  given   Avis  Budget  any  further  legitimacy  in  the  newly  emerging  car-­‐sharing  market  or  help  them   understand  the  target  customers.   Alternative  Structure  of  Deal   We  do  not  believe  this  deal  would  have  worked  so  well  if  structured  as  an  alliance  rather  than   as  an  acquisition.  significant  knowledge  transfer  was  required  from  Zipcar  to  Avis   Budget  (e.  acquisition  would  be  the  preferred  deal   structure  in  this  case.     • Alignment  of  interests  –  Avis  Budget  and  Zipcar  have  different  goals  for  their  relationship.  Structuring  this  within  an  alliance  would  have   been  difficult  to  achieve  as  Zipcar  stood  to  lose  a  lot  of  power  as  Avis  Budget  acquired  their   know-­‐how.  customer  insights).  From  Zipcar’s  point  of  view.  In  the  case   of  Zipcar  and  Avis  Budget.  There  are  a  number  of  different  structures  that  could  have  been  examined.  The  scale   benefits  could  have  been  achieved  within  the  structure  of  an  alliance  but  it  is  unlikely  a   deal  would  have  been  structured  that  provided  the  cash  flow  requirements  for  Zipcar  in  as   secured  a  way  as  can  be  achieved  through  acquisition.

  Avis  will  gain  a  significant  amount  from  a  partnership  that  will  remain  even  if  the  partnership   itself  ceases.  distinctive  culture  that  is  very  different  to  Avis  Budget’s  more  traditional.  customer  insight  and  market  access)  are  relatively  well  established  and   have  been  tried  and  tested  in  a  number  of  different  markets.  Exclusivity   agreements  can  be  written  into  alliance  contracts  but  can  be  difficult  to  achieve  and  to   enforce.  it  would  be  easier  to  preserve  Zipcar’s  culture  with  an   alliance  than  with  an  acquisition:  one  of  the  significant  risks  to  the  success  of  this   acquisition  is  a  cultural  clash.  Additionally.  Since  the  benefits  of  acquisition  outweigh  the  costs.  In  cases  where  these   resources  are  not  yet  tested  or  have  not  been  shown  to  be  successful.  By  acquiring  Zipcar.       Conversely.  when  considering  an   alliance.  Allowing  Zipcar  to  maintain  its  cultural  identity  is  essential  to   the  success  of  this  acquisition  and  should  be  of  key  importance  during  integration  planning.  with  careful  co-­‐branding.  Avis  Budget  could  be  expected  to  develop  these  capabilities   internally  within  a  few  years.  Avis  Budget  ensures  exclusivity.  an  acquisition  seems  to  be  the  right  way  to  structure  this  deal   –  it  is  unlikely  that  an  alliance  would  be  so  successful.  SETH     Page  15     • .  within  a  few  years  of  setting  up  an  alliance.  If  the  partnership   were  to  end.  more   ‘corporate’  culture.  Avis  Budget  stands  to  gain  technological  know-­‐how.   and  with  information  sharing.   Motivation  of  Zipcar  employees  –  There  is  a  moderate  risk  that  the  acquisition  will  have  a   negative  impact  on  the  Zipcar  culture  and  on  staff  morale  and  motivation.  consumer  understanding  and   brand  association.  Additionally.•   • Exclusivity  –  It  is  essential  to  Avis  Budget  that  competitors  do  not  gain  access  to  Zipcar’s   leading  technology  and  to  the  Zipcar  brand  –  Avis  Budget  needs  exclusivity.  both  Zipcar  and  Avis  Budget  have  a  lot  to  gain  from  an  alliance   and  the  power  balance  is  relatively  equal.  Zipcar  would  then  be  in  a  weak   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  this  should  not  be  a  barrier  to  acquisition.   Costs  –  Avis  Budget  can  achieve  significant  synergies  with  Zipcar  (as  detailed  earlier).  we  would  expect  the  balance  of   power  to  shift  and  Avis  Budget  to  become  the  powerful  partner.  Technological  expertise  and  consumer  insights  are  skills  that  can  be  learned.  Zipcar  has  a   strong.  Avis  Budget  will  be  able  to   build  their  brand  with  the  target  demographic  and  gain  legitimacy  in  this  market.     When  considering  these  criteria.  In  many  ways.   These  are  not  things  that  can  be  easily  learned  from  working  alongside  Avis  Budget  and  Zipcar   is  likely  to  benefit  from  these  only  throughout  the  life  of  the  partnership.  Initially.  given  these  resources  have  been  shown  to  be   successful  in  a  number  of  different  markets.  However.     • Commitment  –  The  key  resources  that  Avis  Budget  stands  to  benefit  from  (Zipcar’s   technology.  Zipcar  would  no  longer  benefit.  Over  time.  ROSS.  an  alliance  would   decrease  risk  for  Avis  Budget.  However.  it  is  essential  to  think  not  only  about  what  each  side  will  gain  from  but  also  how  this   will  change  over  time.  Zipcar’s  gains  are  predominantly   benefitting  from  Avis  Budget’s  economies  of  scale  and  having  access  to  additional  cash  flows.  Our   analysis  suggests  the  benefits  of  these  synergies  will  outweigh  the  cost  to  Avis  of  acquiring   and  integrating  Zipcar.  brand.  acquisition  is   favoured  over  alliance  (assuming  all  other  factors  agree).  Thus.

position  with  limited  bargaining  power  to  improve  the  terms  of  the  alliance.  and  little  to  gain.  SETH     Page  16   .  there  is  much  to  lose  from  a  partnership  in  the  long  term.  and  that  an  acquisition  of  Zipcar  by  Avis   Budget  was  the  right  decision.   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  we  would  recommend  that  an   alliance  is  not  the  optimal  way  to  structure  this  deal.  due  to  the  risk  of  this  power  imbalance  occurring.     In  conclusion.  From  Zipcar’s   perspective.  ROSS.

 adjusted  for  the  different   customer  segments  worldwide.PART  3:  AFTER  THE  ACQUISITION   Opinion  on  Integrating  Zipcar  with  the  Avis  Budget  Group   After  analyzing  the  business  and  strategies  of  Zipcar  and  the  Avis  Budget  Group.  it  is  too  early  to  comment  on  the   success  (or  not!)  of  the  actual  integration  between  Zipcar  and  the  Avis  Budget  Group.  ROSS.  2013)  of  Zipcar  by  the  Avis  Budget   Group.  Zipcar   depends  on  the  capital  and  resources  that  the  Avis  Budget  Group  will  provide.  Furthermore.   requires  a  high  level  of  organizational  autonomy  from  the  Avis  Budget  group  to  continue  its   momentum  in  the  car-­‐sharing  space.  given  its  unique  business  operating  culture  (the  company  still  maintains  the   young.  allowing  Zipcar   to  scale  and  experiment  with  the  car-­‐sharing  model  in  an  even  wider  number  of  markets.  the  Avis  Budget  Group  will  need  to  observe  and  use  the  Zipcar  car-­‐sharing  model  as  a   proving  ground  for  further  investing  into  the  model  across  greater  locations  within  its  rental   network.       Assuming  that  the  Avis  Budget  Group  fully  understands  and  is  able  to  realize  the  value  of  the   car-­‐sharing  model  to  its  legacy  business.  after  the   car-­‐sharing  model  has  been  proved.     Given  the  recent  date  of  the  acquisition  announcement.  and  after   analyzing  various  aspects  across  value  capture  and  synergies  across  the  acquisition  of  Zipcar  by   the  Avis  Budget  Group.  the  acquisition  from  the  onset  requires  a   high  level  of  strategic  interdependence  between  Zipcar  and  the  Avis  Budget  Group.  and  understand  its  implications  to  its  traditional  corporate  and  leisure  traveler   customer  segments.  MA).  Zipcar  will  continue  to  operate  as  a  subsidiary  of  the  Avis  Budget  Group  and  will   continue  to  be  headquartered  of  the  US  East  Coast  (Boston.  and  look  for  newer  ways  to   retain  and  grow  the  Zipster  community.   13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.  The  high  level  of  interdependence  here  will  be  the  leveraging  of  both  the   traditional  car  rental  model  as  well  as  that  of  the  car-­‐sharing  model.  manage  daily  Zipcar  operations.     Post  Announcement  Integration  between  Zipcar  and  the  Avis  Budget   Group   Following  the  announcement  of  the  acquisition  (January  2.  In   turn.  vibrant  start-­‐up  mentality)  and  its  innovation  and  leadership  in  the  car-­‐sharing  space.  At  this  point.  SETH     Page  17   .  the  corporate  cultures  of  the  two  businesses  will  need  to   merge  into  one.  At  this  point  in  time.       We  see  that  Zipcar.  the  long  run  integration  between  the  Avis  Budget   Group  and  Zipcar  should  be  that  of  an  ‘Absorption’  acquisition.  Furthermore.  there  should  be  a  low  need  for  organizational  autonomy   across  the  two  entities.  there  will  be   minimum  changes  to  the  existing  Zipcar  management  team.  we  conclude  that  the  integration  between  the  two  companies  should  be   that  of  a  ‘Symbiosis’  approach  in  the  short  run.  as  they  will  continue  to  set  the   overall  direction  for  the  subsidiary.

 for  Fiscal  Year  Ended  December  31.  Please  Don’t  Screw  Up  Zipcar”  -­‐   http://tech.nytimes. SEC  Form  10-­‐K.  2011  –  Zipcar. “Dear  Avis.com/2013/01/02/avis-­‐to-­‐buy-­‐zipcar-­‐for-­‐500-­‐million/   5.com/investing/general/2013/01/04/not-­‐the-­‐end-­‐of-­‐the-­‐road-­‐for-­‐ zipcar. SEC  Form  10-­‐K. “Avis’s  Smart  Zipcar  Buy”  -­‐  http://blogs.  for  Fiscal  Year  Ended  December  31. Zip  car  press  release  on  acquisition  -­‐   http://zipcar.  2011  –  Avis  Budget  Group  Inc.com/felix-­‐salmon/2013/01/02/aviss-­‐ smart-­‐zipcar-­‐buy/       13  J  P3  –  MAACS  EA  –  Group  Report   DHANOA.   2.SOURCES     1.  SETH     Page  18   .fool.com/index.  Inc.cnn. “A  Faster  Lane  to  Profitability”  -­‐  http://dealbook.mediaroom.fortune. “Car  Sharing  Catches  On  as  Zipcar  Sells  to  Avis”  -­‐   http://dealbook.php?s=43&item=294   4.nytimes.   3.reuters.  ROSS.aspx   8. “Not  the  End  of  the  Road  for  Zipcar”  -­‐   http://www.com/2013/01/18/dear-­‐avis-­‐please-­‐don%C2%B9t-­‐screw-­‐up-­‐ zipcar/   7.com/2013/01/02/a-­‐faster-­‐ lane-­‐to-­‐profitability/   6.

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