No 'Buy' From Vonage Bankers

Two of the banks that led the underwriting of the Vonage Holdings Corp. (NYSE: VG) IPO have now initiated coverage of the stock, and neither are recommending it to investors.

UBS AG initiated coverage Wednesday, giving the stock a Neutral rating and a target price of $10. Citibank initiated coverage Monday, placing a Hold rating on the stock and putting the target price at $11. UBS, Citibank, and Deutsche Bank AG led the underwriting and helped set the stock's $17 opening price.

Vonage's underwriters together earned $31.9 million in fees from the deal, according to the May 23 prospectus. (See Vonage Gets a Haircut.) And the banks' target prices seem optimistic. In late afternoon trading on Wednesday, Vonage shares were down $0.36 (4.19%) to $8.24.

Citigroup analyst Michael Rollins said in a brief Monday that recent shareholder lawsuits filed against Vonage make owning the stock risky business. (See Regulators, Lawyers Swarm Vonage and Vonage Class Action: What's the Damage? )

UBS analyst John Hodulik says in a brief today (Wednesday) that Vonage has long-term potential, but must reduce customer churn, lower customer acquisition costs, and increase cash flow before investors will start to believe. (See Vonage S-1 Nuggets.)

Analyst firms that weren't involved in the Vonage IPO seem even more optimistic by comparison. Four have placed a Buy or Market Perform rating on the stock, according to Thomson First Call . Bear Stearns & Co. Inc. gave the Vonage stock a Hold rating. Stanford Financial Group gave the stock a Sell.

The average target price set by the eight firms is $10.60.

Many of Vonage’s own customers bought the stock at the time of the IPO, but refused to pay the underwriters for the shares after the price began its plunge immediately after the IPO. At least nine shareholder lawsuits have now been filed against the company, claiming that it failed to disclose certain risks.

Vonage did not return calls seeking comment for this story.

— Mark Sullivan, Reporter, Light Reading

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