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Vonage Hearing Buy-Out Bids

Light Reading
News Analysis
Light Reading
10/12/2005
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VOIP pioneer Vonage Holdings Corp. has heard several acquisition offers in the last two weeks, a source close to the situation says, and has already rejected at least one worth more than $1.5 billion.

Vonage is ostensibly preparing for an IPO, but has been taking a dual-track approach toward liquidity that includes the possiblity of an acquisition. Sources say the N.J.-based company’s investment banker partners have been looking for buyers for some time. (See Vonage Selects IPO Bankers.)

Meanwhile, analysts in recent weeks have floated a price of $1 billion to $1.5 billion as Vonage's likely valuation if a sale should take place in the near future. (See Vonage Exceeds One Mil .)

And the time for Vonage to sell may be right now.

The $2.6 billion valuation of Skype Technologies SA by eBay Inc. (Nasdaq: EBAY) caused many to believe that Vonage, when the time comes, would receive a similarly generous valuation.

Some observers believe a window of opportunity for a Vonage sale opened when eBay took Skype, and will close on the day Vonage becomes a public company. (See EBay Buys Skype for $2.6B.) Within that window, Vonage has the best chance of leveraging current investor buzz over VOIP to command a high selling price.

Rumors have been circulating for weeks that one of Vonage's suitors is BellSouth Corp. (NYSE: BLS), a notion Vonage has never denied. Board members at one Vonage competitor are so sure the RBOC will take Vonage that they have begun strategic planning as if the deal had already occurred.

A BellSouth acquisition of Vonage might indeed make sense for both parties. BellSouth might pay a premium for a ready-made entrée into the residential VOIP business, virtually erasing the headstart taken by competitors like Comcast Corp. (Nasdaq: CMCSA, CMCSK) and other RBOCs.

And BellSouth may be better positioned to expand the Vonage property than Vonage by itself. BellSouth owns its own access facilities and can offer Vonage service to customers as part of a larger, bundled offering. (See Broadbanders Bubbly Over Bundles.) If Vonage goes it alone, it would likely face persistent investor skepticism over the Vonage business plan’s long-term payoff potential.

Vonage’s eventual exit is seen as very important to the future of an entire class of “pure play” or "replacement" VOIP providers. (See Packet Voice Over Broadband.) A sale could take the valuation of such companies out of the realm of analyst speculation and provide a real cost-per-subscriber dollar amount on which to base future VOIP acquisitions or stock pricings. (See Does VOIP Business Add Up?)

If Vonage is bought at a high price, some analysts believe other privately held VOIP companies like Lingo Inc., Nuvio Corp., and SunRocket Inc. might be emboldened to jump up onto the selling block.

“I think the valuation of Vonage would be high, and I think that would potentially cascade down to 8x8 so you have that ‘rising tide raises the smallest boat’ kind of thing,” says 8x8's VP of sales and marketing, Huw Rees. “I think there’s a feeling that if they get valued at a high amount per subscriber, then we would expect our market cap to rise correspondingly."

— Mark Sullivan, Reporter, Light Reading

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geof hollingsworth
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geof hollingsworth,
User Rank: Light Beer
12/5/2012 | 2:57:48 AM
re: Vonage Hearing Buy-Out Bids
I will admit to not being the sharpest pencil in the drawer, but I cannot see the appeal of Vonage to BLS (or people like them). They already have the voice customers, most of whom would leave for a VOIP provider only if if is cheaper (while still performing as much like BLS's current circuit-switched voice offering as possible). Why does BLS need to pay $billions for Vonage when they can just drop the price on the service they already offer over the network that is already paid for (albeit not yet fully depreciated)? Is this a play on out-of-area voice customers? If so, again I wonder if that is much of a priority, and even if it is, there must be cheaper alternatives than Vonage.

The big issue, it seems to me, is the need to have a bundling solution to use against the MSOs, which is why all the hype over IPTV (and its cheaper, more practical cousin, TV over IP). I am not sure the incumbents have the programing and marketing skills to be successful as the fourth video service provider, but at least I can understand the strategic rationale in spending the billions to give it a shot.

But Vonage is worth $billions to BLS? Enlighten me.
lightpimp
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lightpimp,
User Rank: Light Beer
12/5/2012 | 2:57:48 AM
re: Vonage Hearing Buy-Out Bids
at $1B valuation. I'm sure their looking to meet or beat Skype's dollar value. If BLS doesn't make a move soon than SBC or VZ most likely will!
paolo.franzoi
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paolo.franzoi,
User Rank: Light Beer
12/5/2012 | 2:57:47 AM
re: Vonage Hearing Buy-Out Bids
lightpimp,

But Geoff's point is:

If price of voice is going down (either POTS or VoIP), why would I invest money to build a network when I already have one?

seven
lightpimp
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lightpimp,
User Rank: Light Beer
12/5/2012 | 2:57:47 AM
re: Vonage Hearing Buy-Out Bids
I don't think that the RBOCs would dare cannibalize thier cash cow POTS business even if the current infrastructure is already paid in full. The real issue are the costs that are associated with maintaining the circuit-switched networks. Judging from the stock action in the main telcos, shareholders are beginning to price in erosion of profits in landline operations and also the requirement to deploy their cash to either build or aqcuire VoIP related assets. Is Vonage worth $3B?? Was Skype worth it?? In the end acquiring and maintaining subscriber revenue is really all that matters.
lightpimp
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lightpimp,
User Rank: Light Beer
12/5/2012 | 2:57:46 AM
re: Vonage Hearing Buy-Out Bids
Your exactly correct regarding Vonage not really being much of a VoIP carrier. They are not even a CLEC. More or less their success has been in subscriber aquistion and marketing WooHoo! Nonetheless, the incumbant telcos may be forced to simply re-acquire residential subscribers that they may have lost to VoIP or speculate they will lose them in the near future. The real issue that many people in the industry haven't mentioned is that SOHO or residential profit margins between POTS and VoIP are still relatively small. The real loss for the telcos would be to lose the SMB and mid-level enterprise market share to hosted IP solutions. Businesses pay dramatically higher costs for voice services and hence the telcos have much more to lose within this market segment.
geof hollingsworth
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geof hollingsworth,
User Rank: Light Beer
12/5/2012 | 2:57:46 AM
re: Vonage Hearing Buy-Out Bids
That is definitely part of the question. I certainly understand the argument that an IP network would be cheaper to maintain, and that BLS is already moving that direction starting with their Class 4 switches. But I don't see how buying Vonage helps much (if at all) in that transistion. Vonage's money has mostly gone into acquiring customers, not building a network. They have a few softswitches and gateways and a simple billing system, but their traffic rides on other people's networks. Their value (or lack thereof) is in their customers, which BLS already has. Or so it seems to me.
geof hollingsworth
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geof hollingsworth,
User Rank: Light Beer
12/5/2012 | 2:57:45 AM
re: Vonage Hearing Buy-Out Bids
i would switch from my local POTS provider to Verizonage VoIP if i could tie it in to my VZ cell. (like call home for free on my cell, ring both places, use my 802.11 for cell, etc.)

I buy that too, but again, they don't need Vonage for that and, in fact, Vonage doesn't even help much there (if at all). For that Verizon needs (and is presumeably considering) the sort of software that NextStep and others have for converged fixed/wireless services. Nothing to do with Vonage.
voyce_overipee
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voyce_overipee,
User Rank: Light Beer
12/5/2012 | 2:57:45 AM
re: Vonage Hearing Buy-Out Bids
boy is that the billion dollar question.
probably why we don't run these companies - because we think in terms of cost vs. return.

the only reason i could think of is as you say to get the out-of-area customers. That's new revenue to BLS. Is it worth $1 or 2B? dunno.

To me VZ would make a lot more sense. Because they could tie the vonage voip service to their cell service, both with the wifi-capable cellphones and with free intra-VZ wire-wireless calling offers. That would get my attention for sure, and i would switch from my local POTS provider to Verizonage VoIP if i could tie it in to my VZ cell. (like call home for free on my cell, ring both places, use my 802.11 for cell, etc.)
voyce_overipee
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voyce_overipee,
User Rank: Light Beer
12/5/2012 | 2:57:45 AM
re: Vonage Hearing Buy-Out Bids
at $1B valuation. I'm sure their looking to meet or beat Skype's dollar value.

Why? So that 2 wrongs can make a right?
Skype has more customers at a much lower investment and operating cost and my guess is vonage burns a lot more net cash. (but hopefully vonage has more gross revenue?) And skype has an arguably better world-wide brand name, even with vonage's marketing spending.
rjmcmahon
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rjmcmahon,
User Rank: Light Beer
12/5/2012 | 2:57:44 AM
re: Vonage Hearing Buy-Out Bids
I am not sure the incumbents have the programming and marketing skills to be successful as the fourth video service provider

VZ's FIOS demonstrates that the phone companies do have the skills to acquire the programming and to market the service.
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