Several serious suitors have very recently stepped up to take out Vonage, but Jeffrey Citron's no cheap date

October 12, 2005

3 Min Read
Vonage Hearing Buy-Out Bids

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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