November 13, 2023 — CarOffer founder and serial entrepreneur Bruce Thompson is walking away with another $75 million in cash as CarGurus announced last week it is acquiring the final 49% of the Texas-based online used-vehicle trading platform.
Zach Hallowell, whom CarGurus recently snatched from Cox Automotive’s Manheim division, will lead CarOffer following Thompson’s resignation.
CarGurus acquired 51% of CarOffer in January 2021 for $173.2 million — $103,645,000 in stock and $70,755,000 in cash. Although early reports pegged CarOffer’s enterprise value at $275 million, the amended price CarGurus valued CarOffer at approximately $342 million, according to SEC filings.
For about 18 months, CarGuru’s investment into CarOffer was going like gangbusters — until it began to fall apart.
As wholesale prices dropped in the second quarter of 2022, the number of unwound transactions on the CarOffer platform increased, leading to higher arbitration losses. Declining vehicle prices ultimately exposed weaknesses in the CarOffer platform.
As part of the original transaction agreement, CarGurus had the opportunity to use cash or stock to purchase up to an additional 25% stake in CarOffer in late 2022 but decided to pass on the additional investment in the third quarter last year, due in part to rapidly declining wholesale prices, which led to a 38% drop in wholesale revenue — which is comprised mainly of CarOffer revenue — from the second quarter.
CarGurus CEO Jason Trevisan told analysts on last year’s third-quarter earnings call the company “identified operational issues within our CarOffer business, which negatively contributed to an already tough dynamic. Simply put, the processes and operations, which worked well in a rising wholesale price environment, were not effective enough in a declining price environment.”
According to COO Sam Zales, CarOffer’s inspection process needed to improve. “We just didn’t have enough discipline in our inspection process for the scrutiny that goes on in a down price market,” Zales said on the call.
CarGurus began working with new inspection vendors to identify frame damage while conducting mechanical and electrical inspections. The company also sought to better monitor and understand each vehicle’s history.
As a result, CarOffer began taking a much more conservative approach to vehicles it runs through its platform. Older vehicles with higher mileage that tend to invite arbitration began to get a hard pass.
CarOffer also became more selective in which dealers it invites to participate on the platform, admitting some dealers are more aggressive with their use of the arbitration process than other dealers.
The overall revenue numbers are not any better this year than at the end of 2022. Wholesale revenue of $21.7 million for the third quarter of 2023 is down 54% from $47 million in the prior year and down 32% from $32 million in the preceding quarter.
On last week’s third-quarter earnings call, Trevisan told analysts, “The year-over-year decrease in wholesale revenue was due to our continued prioritization of operational improvements, coupled with less favorable market conditions.
Quarter-over-quarter, we saw a decrease in dealer-to-dealer transactions as dealers experience price uncertainty, coupled with typical retail seasonality in retail sales and rental fleet.”
Despite the challenged financials, CarGurus decided to acquire the rest of CarOffer. “Our decision to expedite the purchase was driven by our strong desire to accelerate new product opportunities that allow us to build an end-to-end transaction-enabled platform even sooner,” Trevisan said on last week’s call.
“Further, this decision aims to help us continue the momentum of our operational improvements to build a stronger platform for our dealer partners. We believe that by accelerating our purchase, we will realize synergies of our integrated platform sooner and create an even better consumer and dealer experience.”