Vonage trades at discount in debut

Internet-phone firm raises $531M in richest Net IPO in 2 years

By Steve Gelsi, MarketWatch

Last Update: 4:14 PM ET May 24, 2006

NEW YORK (MarketWatch) -- Vonage Holdings Corp.'s initial public offering turned in the worst opening day of the year in its stock-market debut Wednesday as Wall Street hung up on the Internet-phone provider. The Holmdel, N.J., company's IPO, one of the highest-profile stock debuts of 2006, closed at $14.85 a share for a fall of 12.7% below its $17 price. The stock opened at $17 and dropped on volume of 33.3 million shares. Vonage eclipsed the 6.7% drop by Resource Capital Corp. (RSO) on Feb. 6 for the weakest IPO start this year.

Vonage (VG) VG14.85, -2.15, -12.6% ) raised $531 million by offering 31.25 million shares via six major underwriters led by Citigroup. The others are Bear Stearns, Deutsche Bank, Piper Jaffray, UBS and Thomas Weisel.Vonage's IPO is the second-richest offering from the Internet sector in five years, according to Thomson Financial. In 2004, Google Inc. (GOOG :GOOG381.25, +5.67, +1.5% ) raised nearly $2 billion.

In an unusual move, Vonage offered up to 13.5% of its stock to its own customers. Francis Gaskins of IPODesktop said the IPO apparently drew interest from retail buyers, but institutional buyers avoided the stock because of the company's red ink. For the period from inception through March 31, its accumulated deficit was $467.4 million.

Growth and losses

Vonage has booked quick revenue and subscriber growth to the latest reported level of 1.6 million, although it hasn't reported a profit since its origins. The company launched its U.S. service in late 2002.

The company, which offers phone service over the Internet at prices lower than those of traditional phone companies, drew a discount of its own in its IPO.

Soleil SurTerre Research on Wednesday initiated coverage of Vonage with a hold rating and a $16 price target, below the company's $17 IPO price.

"We are concerned about the level of competition in the voice telecom business and believe that the stock is pretty close to fairly valued at this level," analyst Todd Rethemeier said in a note to clients.

Vonage plans to use the roughly $494 million proceeds in the offering to fund expansion, including marketing expenses. The company also said it could make an acquisition or make strategic investments.

David Menlow of research firm IPOfinancial said Vonage has a strong brand name, but no proprietary technology to set it apart. Hear interview with David Menlow. "They have too narrow a focus," Menlow said. "The real brass ring is video. That's where the money is, not in voice over Internet protocol (VoIP). What you will see is a deployment of this kind of video and the companies will throw in VoIP for free. Vonage has nothing unique to ensure that customers will be there for lengthy periods."

While the company could turn a profit by 2008, investors may not want to wait that long, he said.

MasterCard IPO awaits

After Vonage, MasterCard (MA ) awaits as the richest U.S. IPO in two years. The credit-card giant will offer 61.5 million shares in an estimated price range of $40-$43 a share for its stock market debut on Thursday.

And in an overseas deal that dwarfs MasterCard, Bank of China priced near the high end of its range in a bid to raise $9.72 billion as the world's richest IPO in nearly six years.

With 155.7 million shares outstanding, Vonage went public with a market capitalization of nearly $2.65 billion, less than the $4 billion EBay (EBAY

EBAY30.20, +0.15, +0.5% ) spent to buy rival Internet phone service Skype last year.
Vonage Founder and Chairman Jeffrey Citron, 35, emerged from the IPO with a 33% stake in the company valued at about $875 million based on the $17 IPO price. Citron stepped down as chief executive in February, when Vonage named Mike Snyder, an executive in the ADT business of Tyco (TYC :Tyco International Ltd.

Citron once paid $22.5 million in civil penalties as part of one of the largest fines ever collected by the Securities and Exchange Commission against individuals, according to regulatory filings by the Internet phone company. Citron also agreed to accept an SEC order that permanently bars him from association with any securities broker or dealer. The 2003 settlement came after an SEC probe of online trading firm Datek.

Citron settled theses charges without admitting or denying the allegations in the SEC's complaint. Citron served as CEO of Datek in 1998 at age 27. In 1995, Citron founded Island ECN, a computerized order-execution system for stocks.

Steve Gelsi is a reporter for MarketWatch in New York. MarketWatch staff writer Ruth Mantell contributed to this repor