Many investors are gushing with joy over Avis' (CAR -0.96%) plans to acquire Zipcar (ZIP.DL2) for a 49% premium. Meanwhile, others are crying because the Avis-Zipcar deal will still make Zipcar an overall negative investment. Whether you're happy or sad, the reality is that you haven't locked in your gains until you sell your stock. So is it time to dump your Zipcar stock, or should you wait for your shares?
Here are two things you can do right now.
Yellow light: Hold on, wait for Avis stock
If you read the press release, the Avis-Zipcar deal seems like a great move for Avis. And if you believe them, then you might make even more on your Zipcar shares.
First, car-sharing is expected to grow to a $10 billion worldwide market in the next several years. In just North America, it's already a $400 million industry. For context, Zipcar's North American revenues for 2011 were $199.3 million. That means that after the acquisition, Avis will command the majority of the North American market.
Second, Avis chose to buy out the best possible company to make waves in the car-sharing market. Zipcar's membership is five times that of its nearest competitor, Hertz on Demand.
Finally, Avis thinks it can wring out $50 million to $70 million a year with Zipcar in its business. With more customers, Avis can negotiate better deals with third parties -- for better financing, maintenance, and car purchase prices. Moreover, Avis can accelerate Zipcar's growth with national and international marketing. Most important, Avis can increase the revenue per car by sharing cars between its brands. As with traditional car rental companies, Avis (and its Budget brand) sees high demand during the weekday and full, unprofitable parking lots during the weekend. Zipcar has the opposite problem; its 760,000 customers make it difficult to find a car on the weekend. All in all, the deal helps Avis improve the per-car economics across its future car fleet.
Despite these great numbers, one serious question still lingers: Can Zipcar investors trust Avis with their investment? Most "rule-breaking" investors bought into Zipcar believing that management could and would turn their investment into a five- to tenfold return. Now that Zipcar owners will unexpectedly own Avis shares, investors are uncertain how this rental car company will fare.
Red light: Sell! Sell out of the management team
Zipcar may be what Avis needs to zip past Hertz as the U.S.' largest rental car company; that doesn't mean Avis investors should expect jaw-dropping investment returns.
Since taking over Avis in 2006, CEO Ron Nelson has had only one profitable year (2010). Over the same time frame, we see that Avis' operating margins have lagged Hertz's.
Source: Company 10-Ks.
Hertz CEO Mark Frissora has managed the company far more competitively than Nelson has at Avis, even though he's been at the helm for around the same amount of time. So what's causing the difference? Probably experience.
Though Nelson has worked with automotive companies since 2003 (including experience as CFO and president of Avis' former parent company, Cendant, most of his career was spent at entertainment giants DreamWorks SKG and Paramount Pictures. On the other hand, Frissora is a second-time CEO who seems to have had direct experience with different areas of the automotive industry since 1996, such as at an automotive parts manufacturer. Frissora's direct experience may be the reason Hertz has flourished compared to Avis.
Now you might say that Zipcar CEO Scott Griffith had little experience in transportation before Zipcar. After all, he was a management consultant at his previous job. The difference here is that Scott Griffith grew with the company since 2003 -- way before the company went public in 2011.
What's more revealing is the structure of the management team beyond the top three. In an industry where customers demand great service akin to a hotel's omnipresent concierge, it's surprising that Avis lacks what Hertz has: an executive seat, a senior vice president dedicated to "Customer Care"! Yet, if Avis were to do something similar, it's questionable -- given Nelson's operating history -- how profitable the move would be.
Green light: ???
Like many Zipcar investors, I'm in the red. I loved Zipcar's convenient service, attractive branding, and innovative story. But the real reason I held on even as the price dropped was that, at the end of the day, I believed in Zipcar's management.
Now that I may own Avis stock, that's no longer true. With Avis' operating margins, executives, and executive history, it's hard to believe that Avis can deliver rule-breaking returns. Yes, there is a billion-dollar market for car-sharing, but Avis' lackluster management may simply balance out any outsize return Zipcar may add to Avis' bottom line.
