Eligible individuals who are Vonage customers can buy between 100 and 5,000 shares in the company at the IPO price of between $16 and $18 a share. Vonage has pitched the deal to its customers as an opportunity to get in on the ground floor of the country’s leading VoIP provider.
And it would be a good deal if the shares, once listed, become bumped up in value. Of course, if the deal bombs and Vonage shares end up trading for lower than the initial $16 to $18 price, these customer-investors lose.
For Vonage, which is in a government-mandated quiet period prior to its offering, the customer-share program is likely a bid to garner loyal, long-term investors, said David Menlo, president of IPOfinancial.com.
The biggest problem that Wall Street has had with the IPO market is the inability to keep the stock in the hands of what’s considered strong holders, Menlo said. That is, investors who are not looking for a quick turn-around on their stock.
The over-arching issue is likely that Vonage’s IPO is an otherwise tough sell. The company, the only pure-play vendor of size in the country, faces looming competition from larger cable, online and telecommunications rivals, many of whom are bundling VoIP with other services.
They could snuff out Vonage with the right keystrokes, Menlo said. They could come into the marketplace and offer free VoIP service for a year and it would not impact their operations.
There’s also the issue of Vonage’s balance sheet. A regulatory filing showed that, while it had more than 1.6 million subscribers on April 1, having more than tripled subscriber lines last year, Vonage is spurting red ink.
Operating expenses during the first quarter ballooned more than two-fold to $88m, of which $88.3m was spent on marketing. That helped widened its first-quarter loss to $72.8m from about $86m a year ago.
This is really a question of how unique is this technology and how much of a grip on the market will Vonage get and be able to hold onto once they become public, Menlo said. If people are looking for an answer to that then Vonage is trying to hold a handful of sand.
So, rather than try to sell its money-losing venture to the financial community, Vonage is taking it to its customers. For sure, its customer share-purchase program is unusual. Because it does not extend to corporate entities, the program is unlike the corporate customer-share deals that were in vogue in the late 1990s. Those deals were being offered notably by telecommunication equipment vendors and were problematic: When large corporate customers bought preferred shares in a vendor’s IPO, it was largely seen as the vendor buying revenue.
However, Vonage is targeting its mom-and-pop consumers. IPO-watcher Menlo said the last prominent novelty deal of this type was in 1995, when brewer Boston Beer offered the first 33,333 buyers of one of its six-pack of beers 33 shares at the IPO price of $15. It worked out well because the IPO price rose to $18, so the direct entrants got a $3 benefit plus a nice buzz from the beer.
With Vonage’s deal, customers are eligible if they signed up for its VoIP service before mid-December, 2005 and remained with the vendor through February 1. They also need to be a US citizen and resident but do not need to be a current Vonage customer.
The Holmdel, New Jersey-based company recently more than doubled the amount it initially hoped to raise in its IPO, from $250m when it first filed to$530m. No IPO date has yet been set, which is typical for a company at this stage of the IPO process.
The deal would give Vonage a market capitalization of $2.6bn – the amount eBay Inc bought Skype Technologies SA, a Vonage rival, for, last September.
