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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geof hollingsworth 12/5/2012 | 2:57:43 AM
re: Vonage Hearing Buy-Out Bids VZ's FIOS demonstrates that the phone companies do have the skills to acquire the programming and to market the service.

Perhaps. Certainly it shows that they can run a successful trial aimed at existing video customers in the Texas regulatory climate. Most of their channels are analog and not digital, so maybe they are still developing those programming skills. I certainly agree that there is strategic sense in pursuing this market, but if it was me, I would be trialing things that the MSO's can't (or don't) do, like the new mtvU +£ber.

Not that it matters for the point at issue, but the underlying FIOS architecture isn't IPTV; itGÇÖs just QAM digital cable over fiber.
voyce_overipee 12/5/2012 | 2:57:42 AM
re: Vonage Hearing Buy-Out Bids Not really related to vonage, but why hasn't Light Reading covered the recent stories of the patent infrigement case against Blackberry that's threatening to shut them down in the US? (it's been all over slashdot)
voyce_overipee 12/5/2012 | 2:57:42 AM
re: Vonage Hearing Buy-Out Bids they don't need Vonage for that and, in fact, Vonage doesn't even help much there (if at all).

I think the you're focusing on the wifi cellphone piece, which obviously can do without vonage style service at all (especially since vonage doesn't actually have the extra protocol support needed for it today, and they focus on the pseudo-fixed MTA model).

But VZ does need them (or someone like them) to get the dual-ring and free intra-calls as a cheap service into the homes they don't reach. My guess is it would be a lot cheaper to get that into those homes using voip than dealing part of the revenue to the RBOC there. if they can work out how to keep the broadband provider from blocking or impacting their voip.

Besides, i can think of some neat things to do if you provide both the voip wifi-MTA and the wifi-cellphone to a home. like make the cellphone another extension of the house line, or integrate my speed dial #s of the two systems, or some other things i should patent right now. of course you can do that with POTS and back-end software too, but again they don't own the pots everywhere.

Of course they could buy someone else or do it themselves, but looking at how slow a company like VZ moves, i bet buying a vonage would make more sense than Bellsouth in the end. (unless it's really billions of $)

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.

Who is NextStep? (other than the OS from the failed NeXt platform i think?)
geof hollingsworth 12/5/2012 | 2:57:40 AM
re: Vonage Hearing Buy-Out Bids Who is NextStep? (other than the OS from the failed NeXt platform i think?)

Sorry, I meant New Step http://www.newstep.com .
I believe their software supports both sets of features you are describing.
alchemy 12/5/2012 | 2:57:36 AM
re: Vonage Hearing Buy-Out Bids My view of the universe:

* Vonage has inhaled something pushing $400 million of VC cash. One can imagine that the liquidation preference on this favor the venture capitalists. If you can't get a billion for it, nobody inside the company makes much money.

* The capital equipment owned by Vonage could be replicated by anybody for $20 million. It's just media gateways and SIP proxies.

* Vonage customers are the worst possible customers. They use Vonage because it has the lowest price. That makes Vonage extremely vulnerable to customer churn. Their only savior is that their number portability is so screwed up that you can't port your number out of Vonage to a competitor. That is bound to be stomped on by the regulators since people are allowed to port numbers into Vonage.

* Vonage has dumped $300 million into marketing their brand. If they don't keep spending to market the brand, natural churn makes their exising customers go away. You can't show a profit since all your cash goes out the door to pay advertising. I don't see how the business model makes sense.

My conclusion:
Some sucker might pay a billion for this dog but I doubt it. I don't see how they can do an IPO without showing a strategy to be profitable. Once they chew through all the VC money and the VC community figures out that the can't make anything on a deal that already has a half billion of VC cash in it, they can't advertise and they stop growing... and eventually contract and train wreck. 5 years from now, it's entirely likely that Vonage will be regarded as the spectacular VoIP crash of all time.
geof hollingsworth 12/5/2012 | 2:57:35 AM
re: Vonage Hearing Buy-Out Bids

So this is Webvan, partie deux?
voyce_overipee 12/5/2012 | 2:57:35 AM
re: Vonage Hearing Buy-Out Bids My view of the universe:

I agree with your view of the universe. the funny thing is you could replace the word "Vonage" with "Skype" for most of your statements, yet ebay was willing to pay $2-4B for it. And Skype hadn't even invested near as much in marketing, and their captial equipment could be reproduced for even less, and they had far less VC investment - yet they went for a bigger price. but then skype did have more customers (if you believe their funny math), but fewer paying customers.

its a crazy world.
choo 12/5/2012 | 2:57:34 AM
re: Vonage Hearing Buy-Out Bids
I dropped VZ POTS and went with Vonage 6 mos ago. I set up my account to simul-call my home phone and my VZ cell phone. I also moved recently and it was just a plug-in at the new location. I'll never go back to POTS.

By the way, Skype has VERY FEW paying customers. Almost everyone uses it for free, and the service is crawling with spammers. It works great for person-to-person calls with other Skype users, and that is about the extent of it.

whyiswhy 12/5/2012 | 2:57:33 AM
re: Vonage Hearing Buy-Out Bids Let's see, a VC-backed hype job called Vonage being worth a $B? Idiot investment bankers with lots of cash, spec,spec,speculating on the next "hot" thing? Never mind engineering reality. It's hot.

Stick someone with hot hype-sause and run.

That's never happened before, right?

spelurker 12/5/2012 | 2:57:33 AM
re: Vonage Hearing Buy-Out Bids I suspect that Vonage has some value to an RBOC.
1. They are an established brandname with $300 million in marketing already sunk. BLS or whoever have zero street cred in this market and would need to spend at least that much $ and time to build to the level of Vonage. Pay 4x this $, but gain 18+ months of history overnight, leverage their installed base of stupid little IP phones and home routers, while taking a non-trivial competitor out of the equation.
2. VoIP makes little sense as a primary line service in the Vonage model -- they have NO control over the transport, therefore they have issues with reliability (90% of the time, no one cares, but for regulatory compliance, emergency/911 services, home alarm systems, etc. reliability is a deal breaker). In an RBOC however, they can guarantee service since they control the infrastructure from the DSL modem all the way to the voice gateway and on to the class-5 switch. Add a battery backup to the DSL modem, and you're done.

So for a company without infrastructure, Vonage would be a risky target. But for a company with a large infrastructure, it is a little more compelling -- though the only thing they have which you couldn't get cheaper is the instant name recognition.
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