Today rental car giant Avis Budget announced its entry into the world of car sharing: It's buying Zipcar. Although Zipcar has yet to turn a profit in its 12-year history, reporting a net loss of over $7 million in 2011, Avis plans to purchase the company and its fleet of more than 10,000 cars for approximately $500 million in cash, a 49 percent premium over the company's closing stock price at year's end.
Yes, Avis might be spending a pretty penny to break into the $400 million car sharing industry, but its decision to acquire industry's largest player probably comes at the right time for both companies. In the past three years, Zipcar's user base has more than doubled from 349 million "Zipsters" to 767 million today. Its revenue has seen a similar increase from $131 million in 2009 to a projected $275 million in 2012.
Yet that success has led to some growing pains. When Zipcar went public last year, one of the risks the company expressed to investors was that "growth has placed and may continue to place significant demands on...our operational and financial infrastructure." Anyone who's attempted to reserve a Zipcar at the last minute on a weekend has probably seen these growing pains firsthand, as Zipcar struggles to keep enough cars around for all its new customers.
At first glance, the deal?which should be finalized sometime in the spring?seems beneficial to both companies. Zipcar retains its identity and gets the larger fleet and more robust infrastructure it needs to meet rising demand, while Avis secures its place in the world of car sharing. But, as the Washington Post's Wonkblog points out, it doesn't always end in success when an older company tries to enter a newer sphere by buying a startup.
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