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Avis will buy Zipcar for $500 million

Mike Segar/Reuters/File

Zipcar Inc. helped create the modern-day hourly car rental industry, giving urban customers instant access to vehicles in their neighborhood. Now the business upstart is becoming part of the mainstream car rental world.

Avis Budget Group, the third-largest car rental company, said Wednesday that it has agreed to buy the Cambridge company for $500 million and make it a subsidiary.

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The acquisition comes as Zipcar, which controls an estimated three-quarters of the North American hourly car rental market, faces increased competition from traditional rental car companies. Enterprise Holdings started its own on-demand service in 2005 and purchased two hourly rental companies in the past year and a half. Hertz Corp. made a major push to expand its hourly car rental service in 2011.

Zipcar has grown quickly since it was founded in 2000 but struggles to earn consistent profits, despite its position as the industry leader. The company posted revenue of $208 million through the first nine months of last year and said it would earn its first annual profit in 2012.

The price Avis agreed to pay, $12.25 per share, represents a 49 percent premium over the value of Zipcar shares on Monday. But that price is about half the peak value of Zipcar’s shares, achieved shortly after the company went public in 2011.

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The Zipcar story began over coffee in Cambridge in 1999, when Antje Danielson told Robin Chase about a company in Berlin that had become successful renting cars by the hour. Soon they launched Zipcar and began promoting their “wheels when you need them” concept in Greater Boston with a small fleet of Volkswagen Beetles, Golfs, and Jettas.

The business expanded one city at a time — in Cambridge, Somerville, and Brookline. ­Municipalities helped by renting a few parking spaces to Zipcar for little or no money.

Today, Zipcar counts 760,000 members and more than 10,000 vehicles worldwide. The majority of interactions with Zipcar members are done through smartphone apps, allowing them to find cars and unlock the doors with their cellphones after activating the reservation with a key card.

“This is a revolution that Zipcar started many years ago, and I think this really cements our position as the pole position in the global mobility market,” chief executive Scott Griffith said.

The hourly car rental market, often referred to as car sharing, became a $350 million industry in North America by 2010, according to the most recent data available from the California research and consulting firm Frost & Sullivan. It is projected to grow 20 to 30 percent a year through 2018.

The traditional rental car industry, while profitable, is not growing in the United States, according to the trade publication Auto Rental News.

Even with big rental car companies snapping up smaller hourly operations, the end of independent car sharing doesn’t appear imminent. There were about 35 car-sharing businesses in the United States and Canada in 2011, according to Frost & Sullivan, and more start-ups are expected to be launched — and acquisitions anticipated to take place — as the market grows.

Avis and Zipcar make a good fit in several ways, analysts said. Avis is busy with business travelers during the week; Zipcar is in higher demand, and sometimes sold out, on weekends, said Chris Brown, executive editor of ­Auto Rental News. Consumers should benefit, provided rates don’t go up, he said.

The acquisition will help Zipcar expand its fleet around the world, Griffith said. It will also give Zipcar members easier access to long-term rentals through Avis and allow Zipcar to invest more aggressively in mobile technology, he said.

Bill Aulet, managing director at the Martin Trust Center for MIT Entrepreneurship, said the acquisition by Avis is the “logical evolution” for Zipcar. Start-ups often get snapped up by bigger companies, spreading their innovations throughout the industry and beyond.

Zipcar was not just another rental car company, Aulet said; it fueled the idea of using technology to share resources.

“If the idea of a profitable business model promoting collaborative consumption is transferred to other industries,” he said, “the legacy of Zipcar will be enormous.”

Zipcar executives said they do not anticipate major changes for the company’s 738 full-time employees. Griffith and president Mark Norman are expected to remain with the company, which plans to proceed with its move from Cambridge to Boston’s Innovation District.

If approved by shareholders, the sale is expected to close in the spring. Zipcar shares closed at $12.18 Wednesday, up $3.94, or about 48 percent.

Katie Johnston can be reached at kjohnston@globe.com. Follow her on Twitter @ktkjohnston.
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