What is Avis buying? Intangibles

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The recent deal by Avis to buy Zip Car has generated a lot of commentary. Wired thinks the deal is great. Steven Pearlstein thinks it will be the death of the Zip Car model. Brad Tuttle at TIME has taken a "let's wait and see" approach. Tuttle does point out the benefits to both Zip Car and Avis. Avis get an easy entry into the growing market of car sharing. It is a market that some think may disrupt Avis' existing business model -- but may be more complimentary than competitive (long term rental for vacation and business travel versus short term immediate trips).

For both companies, what the deal really brings is access to each others' intangible assets. Avis get the new business model and customer base (at a hefty premium). According to Zip Car's latest 10-Q filing, the company had total assets of $429.6 million as of September 31 2012. Of that $107.4 million is goodwill and $3.6 million are booked intangible assets (both from various acquisitions). Specific acquired intangibles include noncompete agreements, trade names, member relationship, reservation systems & technologies and rights to parking spaces. Avis is paying approximately $500 million -- meaning there is an additional $70.4 million in unbooked intangibles and goodwill that Avis is buying. So 25% of Zip Car's booked value is in intangibles and 36% of the value of the deal is due to intangible. In contrast, Zip Car's property and equipment (tangible assets) amount to $175.8 million constitute 35% of the deal. The rest is financial assets held by the company.

Zip Car gets, as Tuttle and the Seeking Alpha blog point out, greater negotiation power with suppliers -- including car manufacturers and insurance companies. Zip Car also gets an entry into the business market that they are beginning to target (Z4B).

Time will tell if the acquisition works out. But one think is clear: its' all about the intangibles.


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