Vonage Lacks Voltage in Its IPO,

With Weakest Debut in 2 Years

Shares Decline Almost 13%

As Investor Interest Wanes

In Money-Losing Web Stocks

Wall Street Journal

Page C4

By SHAWN YOUNG and LYNN COWAN

May 25, 2006

Internet phone-service provider Vonage Holdings Corp.'s initial public offering Wednesday marked the worst IPO debut in nearly two years, a reception that suggested that the excitement over unprofitable Internet calling start-ups has cooled.

Vonage's stock, traded under the symbol VG, closed at $14.85 in 4 p.m. New York Stock Exchange composite trading, down 12.6% from its IPO price of $17 a share. It was the weakest IPO debut since nanotechnology firm Lumera Corp. lost 13.5% of its value on its first day of trading in July 2004, according to data tracker Thomson Financial.

"The magnitude of the drop is a little shocking," said Irv DeGraw, a professor of finance at St. Petersburg College in St. Petersburg, Fla., who specializes in IPOs. "It's a very disappointing debut."

Vonage pursued an IPO after failing to find a buyer willing to pay the more than $2 billion it sought. It set the value of the company at $2.6 billion -- roughly the same price fetched by Skype Technologies SA when eBay Inc. bought it in October. That deal was widely criticized as overpriced at the time.

The decline of Vonage shares reflects investor skepticism about companies that are spending heavily and not posting profits, as well as a harsh market for technology and Internet-related stocks recently, said Francis Gaskins, president of ipodesktop.com, a IPO research firm based in Los Angeles. It also reflects investor concerns about the stiff competition Vonage faces from rivals ranging from online start-ups offering free calls to big phone and cable companies that can package Internet calling with other services such as video and Internet access.

Vonage, citing a legally mandated quiet period, declined to comment.

[Jeffrey Citron]

Vonage, based in Holmdel, N.J., took the unusual step of setting aside 13.5% of the IPO shares for customers. It informed customers of the program through emails, voice-mail messages and letters in an effort reminiscent of Boston Beer Co.'s debut in 1995, when the brewer attached coupons to six-packs making some buyers eligible for as many as 33 shares at $15 each.

The appeal to customers was viewed by some experts as a sign that Vonage got a weak response from institutional investors, and was looking to its customers to create a stable market for the shares, said David Menlow, president of IPOFinancial.com, a research firm based in Millburn, N.J.

Vonage raised $531 million in the IPO, which it expects to spend on expansion and for general corporate purposes. With 1.6 million customers as of March 31, Vonage has expanded rapidly since it launched its service in October 2002. For $24.99 a month, Vonage subscribers can make an unlimited number of calls to the U.S., Canada and much of Western Europe, using regular phones that are linked to their high-speed Internet connections by an adapter. Features such as voice mail and caller ID are free, and customers can use the service when they travel.

Vonage's first-quarter revenue nearly tripled to $118.9 million from the same period in 2005, topping the total revenue brought in during all of 2004. But the growth has brought mounting losses as the company spends heavily on marketing. Although it has an accumulated deficit of $467.4 million, Vonage has no immediate plans to cut back on spending; it said in its IPO prospectus that it will continue to focus on growth rather than profitability. It warned that it might never become profitable.

The company also has been struggling with customer complaints about poor sound quality and substandard customer service. In addition, it hasn't fully complied with a Federal Communications Commission order to provide enhanced emergency-dialing capabilities, or E-911, to all of its U.S. customers.

Among the risks cited in Vonage's prospectus is the regulatory background of its majority stockholder, Chairman Jeffrey A. Citron. In 2003, he paid $22.5 million to settle civil charges from the SEC that he engaged in improper trading when he was chief executive of securities firm Datek Online Holdings Corp. Vonage says in the IPO filing that it believes some financial institutions and accounting firms have declined to do business with the company, at least partly because of Mr. Citron's regulatory problems. It warns that other companies may not be able to do business with Vonage because of internal policies that restrict associations with individuals who have entered into Securities and Exchange Commission and National Association of Securities Dealers settlements.

Mr. Citron owns 33% of the company post-IPO; venture-capital funds own an additional 45% of the company post-IPO. Vonage said in its prospectus that it expects a substantial portion of its public shares to be owned by individual investors rather than large institutions, such as pension funds or mutual funds.

The company offered 31.25 million shares in the IPO, or 20% of the company's stock. The deal was lead-managed by underwriters Deutsche Bank AG, Citigroup Inc. and UBS AG.

Write to Shawn Young at shawn.young@wsj.com and Lynn Cowan at lynn.cowan@dowjones.com