Board: RBS Zipcar
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Well, an exciting end to the Zipcar ride! I am a little disappointed on the one hand, as I believe the business will be worth a lot, lot more in the future. On the other hand, a 50% pop on an investment in my portfolio is more than welcome at any time. After all, the future is a mystery, and the increase to my net worth this morning is real.
First of all there was some sentiment expressed earlier that management somehow failed us with this deal. I understand how some might feel this way, but a 50% premium to the current market value is about as good as it gets in M&A. By making this deal, ZIP management was definitely looking out for their current shareholders. Did they do the right thing for their business or did they "truncate success?" Again, it may feel like the latter to us, because as far as we are concerned, the business will cease to exist when the buyout happens. But in reality, it will live on, and it may be that this move is a tremendous thing for their business. Avis (ticker: CAR) has a global reach, a ton of money to spend on marketing, possibly cheaper financing for vehicles, and I'm sure a number of other business assets that could benefit the Zipcar business. We may start seeing Zipcars all over the world now. (Of course, the founders may discover some of the disadvantages of being part of a huge company, but that's another story.) In any case, if I were Avis, I would have tried very hard to keep the management in the business and heavily loaded the deal with forward incentives for them. So I think, from first blush, management did right by existing shareholders (at least as well as they could when the opportunity arose) and probably did right by the business.
Was there anything wrong with our investment thesis in ZIP? I firmly believe not. In fact I believe that more firmly today than I did yesterday. If anything, Avis' purchase of the company confirms what we Foolish ZIP followers had believed: that the market was undervaluing the potential of the business. In fact my concern had never been about competition from Hertz, but that the market size for car sharing might end up being less than anticipated by Zipcar. But I think Avis would not have bought the company if they thought the market was approaching saturation. And they certainly have little to fear from Hertz in this space now. Hertz has been very careful never to reveal the size of the business they are getting from "On Demand", and probably with good reason. We can reasonably assume it is immaterial. Now Avis will have the best business in the space, with over ten years of operating history.
So I think this deal confirms our thesis in the investment, rather than calls it into question. But what about folks like me who actually lost money? (I am down 19% after investing over the last year and a half or so.) Does that mean we did something wrong? Can we avoid such outcomes in the future? I think not. I think you just have to expect that some investments just don't pay off, even if your reasoning and approach are excellent. I think it would have been virtually impossible to predict this outcome at the time ZIP was recommended. The falling stock price set the stage for the buyout. If you sold after the stock price dropped, say after last April, you were too late and you missed out on the pop today. If you had anticipated before that that the market would turn skeptical of the company's growth, more power to you, but perhaps you missed out on an opportunity when the company became extraordinarily undervalued this summer. My point is that you have to be very, very clever to completely avoid such events. I don't even try, and I don't worry about it when it happens. I expect to have losers. In the long run, if I am investing in successful businesses, the winners will more than compensate for the losers. ZIP may have ended up as a losing investment for me, but it was not a "failure" in my mind.
Sporting analogies maybe get overused, but if you have a baseball team with a bunch of players that "fail" at the plate 60% of the time, you will probably win a lot of championships. Likewise, we don't need to wring our hands when some anticipated event causes us to lose some money. That's not a failure in my mind, as long as we are sticking to our philosophies and methods. I think if we are successfully applying our investment methods (and they are truly good methods), we are not failing, even with some losing positions. In the case of Zipcar, I personally feel I did a pretty decent job of managing my position. I kept it a reasonably small size, which was appropriate for that situation and for my portfolio. The only thing I think I could have done better, with 20/20 hindsight, was that as I was studying it through Q1-Q3 this year, I was becoming more convinced at the solid execution of the business and their position in the marketplace, so I probably could have added to the position as my confidence in them increased. I thought I'd have more opportunity to do that later -- but really there was no way for me to know that there wouldn't be.
Another poster was lamenting the time they put into studying this company. I'd be willing to bet that I topped everybody in that department. I got inspired about the "Ticker Guide" thing, and I think I read almost every word publicly written about the company over the last year, as well as listening to the conference calls and investor presentations, and reading all material that they post on the investor relations site. Frankly, I think I know as much about this company as almost anybody else outside the company. I even snooped around Cambridge, MA on a business trip to try to understand the transportation environment in their home territory there (sorry I never got around to posting about that.) I spent dozens of hours studying the company and I don't feel that any of that was wasted. It was a fascinating story and I think I improved my skills at studying and analyzing companies as a result. I came up with the idea of a "Quarterly Business Scorecard" which I think was very beneficial (to me at least) and will probably try that again. So my point is just this: the value of the time spent studying this business was not wasted just because the particular investment position is coming to an end. There may be many other businesses that share characteristics with Zipcar (excellent execution, experienced management, data-driven operations, maniacally loyal customers, market misunderstood by Wall Street.)
So my message to ZIP investors is: don't be discouraged. There is a lot to take away from the experience, even if you didn't take away much $$. And if you had the courage to buy since last April (or at least resisted the temptation to sell) in spite of the plunging stock price, congratulations.
(Soon-to-be-former) ZIP Ticker Guide