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Vonage to Proceed with IPO Valuing Company at $2.65 Billion
[April 28, 2006]

Vonage to Proceed with IPO Valuing Company at $2.65 Billion

Executive Editor

Contrary to rumors that it would suspend plans to go public, Vonage (News - Alert) Holdings on Friday amended its necessary paperwork to proceed with its proposed initial public offering, essentially valuing the nation’s leading VoIP service provider at $2.65 billion.


The amended S-1 registration statement comes amid speculation that Vonage considered pulling its IPO plans in lieu of a privately negotiated M&A transaction to sell the company. The company first filed its S-1 registration statement back in February, initially assigning an estimated IPO value of $250 million.


But according to today’s SEC filing, Vonage now hopes to raise nearly $500 million through the sale of 31,250,000 shares between $16 and $18 each. Net proceeds from the offering will be used to fund expansion of its business, including its hefty marketing expenses. For the full year, marketing expenses totaled $243.4 million, nearly as much as the $258.2 million garnered in telephony services revenue in 2005.


And marketing expenditures aren’t slowing down any time soon. Last year, in the first quarter, the company spent more than $55 million on marketing but, for the first three months of this year, the marketing totaled $88 million.


“They are going to have to go back to the market pretty soon,” chided Will Stofega, VoIP analyst at IDC, referring to the inevitability of a secondary offering after the IPO.


Vonage also owes more than $650 million to creditors that helped out in several financing rounds. And that doesn’t even take into account the financing that venture capitalists contributed in earlier phases. “Their VCs want their money back. That's part of the game and when that actually happens, I guess VCs can be happy,” Stofega told TMCnet.


Of greater concern to the IDC analyst, though, is Vonage’s complacency. While competing services like eBay’s Skype (News - Alert) has been busy diversifying to multi-modal platforms whether it be from ISV or cellular handsets partners, Vonage has retained the same business model – one that is accompanied by an extraordinarily high per-subscriber acquisition cost. For example, Skype today announced it has reached 100 million users.


“What are they doing to change their image? Not necessary from a marketing perspective but how are they going to become more of a company on many different platforms?” Stofega questioned. “I'd love to see them concentrate on other things. I'm not getting any new messages from their ad campaign.”


For example, while Covad (News - Alert) Communications and 8x8 (with its Packet8 Internet Phone Service) have been courting small- to medium-sized businesses, Vonage’s comparative SMB offerings have been relatively overshadowed by its consumer branding efforts.


“They were going to attack the small business market. But that sort of stopped. We didn't hear that much about their small business strategy,” he added.


One obvious advantage with this (and any) IPO is it leverages the company’s ability to use its stock as a currency. In that sense, the company could buy into new technologies (e.g. video, WiFi (News - Alert) telephony, etc.) using its stock to fund future M&A transactions. But Stofega said there’s a big caveat with that tactic:


“I guess they could … if it holds up. That's something that might be a way of getting them back in the game.”


The number of shares offered in the IPO is equivalent to about 20 percent of the company. With only one-fifth of the outstanding stock floated to the public, it would be impossible for any prospective M&A buyer to take over the company without privately negotiating with investors and management. After the IPO, the company will have 155.7 million shares outstanding, valuing the company at $2.65 billion at the mid-point of the proposed IPO pricing range. When the dust settles, management and directors collectively will own about 60 percent of the company. Vonage Chairman Jeff Citron, alone, will own 33 percent of the company.


The company chose to list its shares on the New York Stock Exchange with a proposed ticker symbol of “VG.”




Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.


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