Avis

Budget & Zipcar

Mergers, Acquisitions, Alliances & Corporate Strategy

Jaideep Dhanoa Julie Ross Karan Seth February 1, 2013

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

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EXECUTIVE SUMMARY
On January 2, 2013, the Avis Budget Group formally announced the acquisition of Zipcar for $12.25 per share in an all cash deal valued at approximately $500 million. The transaction is currently subject to approval by Zipcar shareholders and other customary closing conditions, and is expected to be completed by the second quarter of 2013. Through this acquisition, the Avis Budget Group aims to get a foot-hold in the car-sharing space of the overall automobile rental industry, and expects that the combination of the two entities will result in $50 - $70 million in annual synergies. The purpose of this report is to take a look at both the acquiring company (Avis Budget), and the target company (Zipcar) and get an understanding of each entities respective corporate strategy and corporate advantage. Next, the report provides detail on the value capture and monetary / non-monetary synergies resulting from this acquisition, and reviews the deals from both the perspective of the acquirer and the target. Finally, the report concludes with an opinion on how short and long-term integration between the companies.

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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, a provider of business and consumer services within the real estate and travel industries. 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. These three businesses are: 1. Avis Rent a Car System (commonly referred to Avis) The Avis business unit is a major player in the global car rental business. Avis predominantly caters to the premium corporate and leisure segments of the travel industry. Worldwide, the Avis brand is available in approximately 5,200 locations (including airport locations), generating total revenues of $3.8 Billion in 2011 for the Avis Budget Group. 2. Budget Rent a Car System (commonly referred to as Budget) Budget is the second largest business unit of the Avis Budget Group, and is also a major player in brand in the global car rental business. Complementing Aviss business of premium rentals, Budget caters to value conscious car rental segments. Budget car rental locations are available in approximately 3,050 locations worldwide (including airport operations), accounting for total revenues of $1.7 Billion in 2011 for the Avis Budget Group. 3. 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. Budget Truck is one of the largest local and one-way truck rental business targeted at individual consumers within the United States. Budget Truck is the smallest business within the Avis Budget Group, generating $376 Million in revenue for the 2011 fiscal year. In analyzing the corporate strategy and business model for both Avis and Budget car/truck rental segments, we conclude that these are businesses with core competencies in automobile short and long term rentals. These businesses focus on renting only four-wheeled vehicles. Furthermore, the groups business model consists of renting vehicles for at least a days use, and making use of ancillary add-ons to car rentals (from GPS equipment, to vehicle insurance) and promotional deals to drive customer revenues from both their corporate and individual customer segments. 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 groups annual revenue). The role of the corporate parent here is to act as a coordinator of central services, where there is high level of integration between the three business units (i.e. knowledge sharing, technical systems and process
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sharing). The corporate parent is responsible for the major decisions that affect the operation of each business unit. Similar to any major corporation, the Avis Budget Group aims to grow profitability across the various business segments; to grow market share in the automobile rental industry; and to reduce costs through process improvements and synergies across global operating units. The role of the corporate parent can be defined through its core strategic initiatives. 1. Optimize the Multi-Brand Strategy Avis and Budget are two major brands in the automobile rental industry. 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; Budget as a brand targeted to value-conscious travelers). Although the two brands share many back office functions and administrative infrastructure, the corporate parent needs to align the different brand strategies (e.g. product offerings, pricing systems, and marketing channels) that results in the greatest bottom line profit for each business unit. 2. Grow Top Line Revenue Across the Avis, Budget, and Budget Truck business units, the corporate parent continuously looks for new ways to grow revenue through its core business (i.e. renting vehicles) and through ancillary revenue streams (i.e. add-ons to each rental such as insurance, GPS systems, electronic toll collection systems, or Satellite Radio units). The corporate parent also needs to look at different business models for growing revenue, which may include prepayment for certain rentals, to completely changing the car rental model (such as the car-sharing model). 3. Grow Profits This is where the introduction of data analytics, risk management and technology comes into play. As a car rental business, the Avis Budget Group continuously looks into optimizing its yield management and pricing management algorithms to improve profitability per rental day. From a cost perspective, the group analyzes ways in which to cut costs (through the use of process improvement initiatives, or through technology solutions that reduce long term variable costs). Finally, the corporate parent must also look to match fleet sizes at locations to expected demand on a regular basis, and maintain the necessary liquidity to fund the overall group operations. The Avis Budget Corporate Advantage As a consolidated group, Avis Budget has a corporate advantage in the automobile rental industry. The corporate advantage is driven through key organization linkages across business units, especially through the car rental business that accounts for 95% of the groups annual revenue. In short, both Avis and Budget target different industry segments but share the same fleet, maintenance facilities, systems, technology and administrative infrastructure. The primary linkages that drive the corporate advantage include:
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1. Reservation Methods Both Avis and Budget brands leverage similar technology for making reservations, i.e. online portals, mobile portals, phone reservation centers, online travel portals and also share travel agents and specific partners such as airlines. Each of these resources can determine the ability to fulfill a customer rental at a given time. 2. Marketing Both Avis and Budget support their respective brands through a variety of different channels and campaigns. This includes partnering with other players in the travel industry such as airlines, hotel groups, and credit card companies. Both brands also have their own loyalty programs targeted to individual and corporate customers, and to small, medium and large businesses. 3. Licensing / Franchising In addition to running its own rental operations, both Avis and Budget brands also use licensing as a means of generating royalties for the corporate parent. 4. Data Analytics Across the Avis and Budget brands, there is a common link between the worldwide reservation, rental, data processing and information management systems. These systems focus on fleet planning, yield management, pricing decisions, business mix with customer segment, data warehousing, sales and marketing systems, and customer service processes that help keep the Avis Budget group competitive in the automobile rental industry. 5. 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.

Zipcar Corporate Strategy

Zipcar Overview & Comparison to Avis and Budget Zipcar is a pioneer in the car-sharing network, and can be considered a major upstart within the automobile rental space. The key difference in the Zipcar business model when compared to traditional car rental companies is Zipcars 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. Taking a further look into Zipcar and its corporate strategy, Zipcars 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, which are focused on individuals who require a car to meet corporate travel or vacation needs). Zipcar customers tend to be urban residents looking for vehicle to help with daily/weekly errands where public transportation is ill suited (e.g. weekly trips to the shopping center, or a one-off trip to a furniture store such as Ikea); university faculty, staff and students where university communities need to optimize public space, and where it is inconvenient or expensive for
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students to own a car on campus; and for local municipal agencies and small businesses where the costs of maintaining a fleet of cars for business is not ideal. Zipcars corporate strategy is focused on growing membership to its car-sharing network. This is in contrast to Avis Budget which does not require membership of customers. 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, and in any community they may currently be in (whether home or outside of their place of residence/business). 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. Lastly, Zipcar provides its members the option to choose the actual make and brand of the vehicle they wish to drive. Based on availability in the rental area, Zipsters select a model based on their personal preferences, and on their actual need for the vehicle. This is in contrast to the traditional car rental model where users simply specify the size of vehicle needed, leaving it up to the rental agency to decide which car to rent based on availability in the rental area. Role of the Corporate Parent As a small, 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, Zipcar is predominantly focused on the growth of its existing business. This strategy consists of: 1. Increasing Adoption in Existing Markets Zipcar is focused on major metropolitan areas within the United States, Canada, the United Kingdom and Spain. There is still untapped potential within these markets to grow the car-sharing concept, and capture market share from traditional rental car companies and automotive dealerships wishing to push car ownership and leasing on residents within these areas. 2. Expanding into New Markets As the concept of car-sharing grows, Zipcar is looking to grow both domestically in the United States and internationally. The expansion into new markets is into markets that can support car-sharing (i.e. metropolitan, urban areas). To date, Zipcar has grown both organically and through acquisitions, acquiring other upstart car-sharing firms such as Flexcar (United States) in 2007, Streetcar (United Kingdom) in 2010, and Avancar (Spain) in 2011. 3. Growing the Relationship with Members The Zipcar model is driven through its membership, and as such the company looks for newer ways to enhance the customer experience. Past enhancements of the model have included the creation of Zipvan, where customers may rent a van based on the car-sharing model, and targeted marketing and promotions based on the Zipsters customer information, preferences, and renting history.
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4. Enhancing Technology within its Car-Sharing Business Zipcar maintains a fully integrated platform that centralizes the management of reservations, member services, fleet operations and financial systems (similar to other car rental companies). In addition to this, Zipcar will continually focus on using technology to enhance the customer experience of using Zipcar. Past examples of this have included smart phone applications that allow its members to reserve a vehicle in a particular area, and use that application to start the vehicle when it is ready for use. 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. Zipcar does not operate multiple brands of car-sharing services, and acts a single entity within the car sharing space.

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PART 2: DURING THE ACQUISITION

Potential Synergies
The synergies of this acquisition can be grouped into cost-savings synergies and revenue enhancing synergies. In regards to cost-savings, this merger will enable Zipcar to leverage Avis Budgets economies of scale and operational efficiencies to achieve substantial savings in its operations. Specifically, Avis Budget expects significant cost reductions across the management of Zipcars 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, 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, efficiently dispose of them after expected (and unexpected) wear and tear, and generally make profits by managing enormous cash flows coming in and going out of the business. For a small company like Zipcar, 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. Avis Budget plans to leverage Zipcar's technology to expand mobility solutions under the Avis and Budget brands. Zipcar would represent Avis Budgets laboratory where new technologies are tested and experimented. By sharing these technologies, Avis Budget will be able to save on present and future technology expenses. Other cost savings are found from the colocation of rental spaces, and the elimination of Zipcars public-company costs. On the revenue side, the two companies plan to improve their fleet utilization on weekends, when Zipcars fleet is constrained and Avis Budget has excess supply. In fact, a big problem that Zipcar had was that it could not meet demand over weekends: the companys 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 Budget, Zipcar can offer its members Avis Budget cars when dedicated Zipcars are unavailable, thereby reducing lost sales. Additionally, by leveraging Avis Budgets airport locations, Zipcar will also be able to offer customers one- way rentals to airports, a service currently offered by Hertz and Enterprise, two of Avis Budgets rivals. The ability to offer this one-way airport rental service should add to top line sales revenues. Additionally, Zipcar and Avis Budget have access to two distinct customer bases: young, urban Zipsters in the case of Zipcar and traditional business and leisure car renters in the case of Avis
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Budget. The acquisition provides the opportunity for cross-selling to these segments i.e. offering the ease and convenience of Zipcar to Avis Budgets traditional user base and vice versa. This offers the potential to grow top-line revenue for both entities with reduced requirement for customer acquisition investment.

Value of Synergies

When observing the market reaction to the acquisition announcement, one can gain an understanding of the markets estimated value of total synergies. On the date of the announcement, Avis Budgets announced acquisition price of $12.25 a share represented a 49% premium, or $161MM more than Zipcars market cap. This premium of $161MM reflects the markets view of the share of synergies captured by Zipcars shareholders. On the same day, Avis Budgets share price also saw a 4% jump from $19.39 to $20.21, reflecting a $87.3MM increase in market cap. This increase of $87.3MM reflects the markets view of the share of synergies captured by Avis Budget. Combining Zipcars takeover premium with Avis Budgets share price appreciation, one can see the market estimate of total synergies is $161MM + $87MM = $248MM.

Market Value of Synergies

Synergies captured by Avis Budget, $87,000,000 Zipcar takeover premium, $160,000,000

Total synergies $ 248MM

Avis Budget has said it expects to generate $50 to $70 million in annual synergies as a result of the deal. According to estimates provided by Reuters, the breakdown of these synergies is as follows:

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 These factors would improve Zipcars profitability substantially. Last reported full year data shows Zipcar making a loss (net income -$7MM on $241MM sales). However, data from Q3 2012 shows the company moving into profitability with 5.5 percent net margin, or $4.3MM of net income on $78.2MM sales. With the synergies identified analysts believe Zipcars net margins could jump all the way to 18 percent. Of course, a good portion of any benefit from sharing fleets would really belong to Avis Budgets existing business. Nonetheless, according to Reuters, these anticipated synergies, with a net present value after tax of $175MM, would still exceed the $161MM takeover premium.

1. Equipping Aviss cars with Zipcar technology and making them available on the weekend could increase revenue by up to $25 million a year 2. 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, could add $30 million after tax to annual profit 3. 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. the decision creates value for current shareholders. As such, if we were in this role, 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.e. an outcome that increased the value of the shareholders stake in the firm. Research shows that, in general, acquisitions do not positively contribute to an acquiring firms performance and that 50-80% of M&As are considered non-value creating. Given this, it is of great importance that the Board ensures the decision to acquire is made for the right reasons. The Board has an important role to play in ensuring the M&A activity they are presiding over is successful. There are a number of reasons why M&A occur which are not based on creating shareholder value. The Board must question management adequately to ensure such reasons are not the driving force behind the acquisition. Reasons that are not primarily driven by value creation include: Managerial biases - Managerial overconfidence - Management unwilling to walk away from deal they have significantly invested in
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Social proof pressure i.e. waves of acquisition occurring in industry

Given these considerations, we would ask the following questions about the deal: 1. 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? - 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. 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 - Top management incentivised to perform M&A as compensation linked to firm size - Investment bank compensated based on deal closes

3. 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 Zipcars management team? Where do we expect future growth to come from for - Zipcar - 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, Avis Budget was facing a number of critical issues, particularly when considering their future position in the industry. Avis Budget had a
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strong position in the existing car rental market and was (and still is) active in multiple geographies across the globe. The company had a position both in the traditional leisure/commercial segment and the budget conscious segment of car renters; however, 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. At the time of the acquisition, car rental consumers were beginning to demand increasing flexibility, more convenience and more personalized/individualized service. Additionally, as car ownership started declining (particularly in urban locations), there was increasing demand for short term (less than 24 hour) rentals and a change in the demographic of those renting cars. Specifically, young urbanites were increasingly looking for alternatives to car ownership. This demographic is quite different from Avis Budgets classis customer demographics of business travelers and holiday makers. Aviss key competitors (i.e. Hertz, Enterprise) had already started moving into this space and were offering hourly car-rental services to their customers. Thus at the time of the deal, Avis Budget was lagging behind competitors in gaining a foothold in this new, growing market. To understand how best to grow in the future, Avis Budget had to first understand the resource gap that they faced in updating their business model. The key resource gaps they were facing included: Access to, and understanding of, 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. The first decision would be whether to buy or build to fill the gaps. Developing the capabilities required in-house would have taken significant time (i.e. building brand) and some of the capabilities are not easily imitable (i.e. technology). Additionally, 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. As a result, 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. Upon analysis, we conclude that Zipcar does fulfil Avis Budgets needs in terms of closing the resource gap: Zipcar has built a strong brand among young, urbanites and is well recognized by this demographic - In contrast, Avis is seen as a dinosaur of the car rental business
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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, 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. This allows Avis Budget to leapfrog competitors (e.g. 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, technology to remotely unlock and lock cars, etc.). Avis can harness this technology to increase the efficiency of renting and to improve the customer experience

Based on this assessment of Avis Budgets resource gap and Zipcars ability to fulfil the gap, Avis Budget stands to gain significantly from this deal. As discussed earlier, the markets reaction indicates that the acquisition was seen as a value creating move. Acquiring Zipcar allows Avis Budget to play both an aggressive and a defensive move. By establishing a dominant position in the newly emerging car-sharing market, 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. 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, mostly through acquisitions of competitors. However, at the end of 2011 they had yet to achieve profitability (they were expected to achieve profitability in 2012). The reason for the lack of profitability was the capital required to fund Zipcars recent aggressive expansions. The business has high fixed costs due to the need to expand fleet ahead of entering new markets. While Zipcar had been successful in building their brand, extending their customer base, and establishing a dominant market share position, this had come at the detriment of cash flows and profitability. Zipcar was in a relatively unsustainable position and it was unclear how it would fund future growth. To reiterate, Zipcars resource gap was focused around scale, access to capital, and cash flow. Avis Budget were able to provide all elements of this resource gap to Zipcar - As of 2011, Avis Budget fleet comprises 393,000 vehicles, while Zipcars was at 11,000. The acquisition would allow Zipcar to benefit from the significantly increased scale of the

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merged entity, specifically allowing them to achieve cost savings around procurement and insurance costs. Avis Budget is a mature company with stable cash flows and a reported ~$550M available cash. The acquisition allows Zipcar access to these financing resources allowing investment in future expansion and alleviating cash flow concerns.

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. There are a number of different structures that could have been examined. Licencing Avis Budget could have licenced Zipcars technology and implemented it in its own fleet. This would have increased the level of customer service Avis Budget was able to offer and would have improved some of their flexibility options. However, 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. Additionally, Zipcar would have been able to licence the technology to multiple players leaving little competitive advantage for Avis Budget to leverage. 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. 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. In the case of Zipcar and Avis Budget, significant knowledge transfer was required from Zipcar to Avis Budget (e.g. technology, customer insights). 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. Thus, based on coordination issues, acquisition would be the preferred deal structure in this case. Alignment of interests Avis Budget and Zipcar have different goals for their relationship. 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. This is a significant risk to Zipcar, who would face a cash-rich and powerful competitor in its market space. Thus, for Zipcar, acquisition is the safer deal structure. On the other side, Zipcar stands to benefit from scale benefits associated with procurement and from access to Avis Budgets cash flows. 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. From Zipcars point of view, setting up a strategic alliance would not have been an optimal deal structure in this case.
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Exclusivity It is essential to Avis Budget that competitors do not gain access to Zipcars leading technology and to the Zipcar brand Avis Budget needs exclusivity. Exclusivity agreements can be written into alliance contracts but can be difficult to achieve and to enforce. By acquiring Zipcar, Avis Budget ensures exclusivity. Costs Avis Budget can achieve significant synergies with Zipcar (as detailed earlier). Our analysis suggests the benefits of these synergies will outweigh the cost to Avis of acquiring and integrating Zipcar. Since the benefits of acquisition outweigh the costs, acquisition is favoured over alliance (assuming all other factors agree). 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. Zipcar has a strong, distinctive culture that is very different to Avis Budgets more traditional, more corporate culture. In many ways, it would be easier to preserve Zipcars culture with an alliance than with an acquisition: one of the significant risks to the success of this acquisition is a cultural clash. Allowing Zipcar to maintain its cultural identity is essential to the success of this acquisition and should be of key importance during integration planning.

Commitment The key resources that Avis Budget stands to benefit from (Zipcars technology, brand, customer insight and market access) are relatively well established and have been tried and tested in a number of different markets. In cases where these resources are not yet tested or have not been shown to be successful, an alliance would decrease risk for Avis Budget. However, given these resources have been shown to be successful in a number of different markets, this should not be a barrier to acquisition. When considering these criteria, an acquisition seems to be the right way to structure this deal it is unlikely that an alliance would be so successful. Additionally, when considering an alliance, it is essential to think not only about what each side will gain from but also how this will change over time. Initially, both Zipcar and Avis Budget have a lot to gain from an alliance and the power balance is relatively equal. However, Zipcars gains are predominantly benefitting from Avis Budgets economies of scale and having access to additional cash flows. 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. If the partnership were to end, Zipcar would no longer benefit. Conversely, Avis Budget stands to gain technological know-how, consumer understanding and brand association. Technological expertise and consumer insights are skills that can be learned, and with information sharing, Avis Budget could be expected to develop these capabilities internally within a few years. Additionally, with careful co-branding, Avis Budget will be able to build their brand with the target demographic and gain legitimacy in this market. Over time, Avis will gain a significant amount from a partnership that will remain even if the partnership itself ceases. Thus, within a few years of setting up an alliance, we would expect the balance of power to shift and Avis Budget to become the powerful partner. Zipcar would then be in a weak
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position with limited bargaining power to improve the terms of the alliance. From Zipcars perspective, there is much to lose from a partnership in the long term, and little to gain. In conclusion, due to the risk of this power imbalance occurring, we would recommend that an alliance is not the optimal way to structure this deal, and that an acquisition of Zipcar by Avis Budget was the right decision.

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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, and after analyzing various aspects across value capture and synergies across the acquisition of Zipcar by the Avis Budget Group, we conclude that the integration between the two companies should be that of a Symbiosis approach in the short run. We see that Zipcar, given its unique business operating culture (the company still maintains the young, vibrant start-up mentality) and its innovation and leadership in the car-sharing space, requires a high level of organizational autonomy from the Avis Budget group to continue its momentum in the car-sharing space. Furthermore, the acquisition from the onset requires a high level of strategic interdependence between Zipcar and the Avis Budget Group. Zipcar depends on the capital and resources that the Avis Budget Group will provide, allowing Zipcar to scale and experiment with the car-sharing model in an even wider number of markets. In turn, 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, and understand its implications to its traditional corporate and leisure traveler customer segments. Assuming that the Avis Budget Group fully understands and is able to realize the value of the car-sharing model to its legacy business, the long run integration between the Avis Budget Group and Zipcar should be that of an Absorption acquisition. At this point in time, after the car-sharing model has been proved, there should be a low need for organizational autonomy across the two entities. At this point, the corporate cultures of the two businesses will need to merge into one. 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, adjusted for the different customer segments worldwide.

Post Announcement Integration between Zipcar and the Avis Budget Group
Following the announcement of the acquisition (January 2, 2013) of Zipcar by the Avis Budget Group, 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, MA). Furthermore, there will be minimum changes to the existing Zipcar management team, as they will continue to set the overall direction for the subsidiary, manage daily Zipcar operations, and look for newer ways to retain and grow the Zipster community. Given the recent date of the acquisition announcement, it is too early to comment on the success (or not!) of the actual integration between Zipcar and the Avis Budget Group.

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

13 J P3 MAACS EA Group Report DHANOA, ROSS, SETH

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