What's Up With Force10's Vonage Deal?
Vonage recently pointed out in its S-1 filing, under the disclosures of its "related party" deals, that it bought just over a million dollars worth of routers from Force10 in 2004 and 2005. The reason this was disclosed as a related party transaction is that Vonage and Force10 have close financial relationships with two of the same VC firms -- New Enterprise Associates (NEA) and Meritech Capital Partners .
Says the Vonage S-1: "We purchase routers from Force10 Networks, Inc. on an as-needed basis. In 2004 and 2005, we paid Force10 Networks $0 and $1.1 million, respectively, under the contract.” (See Force10 Takes $40M, Talks IPO.)
It continues: “Affiliates of New Enterprise Associates (NEA), a holder of more than 5 percent of our voting capital stock, own an approximate 24 percent interest in Force10 Networks. In addition, an affiliate of Meritech Capital Partners II L.P., also a holder of more than 5 percent of our voting capital stock, owns a 6.8 percent interest in Force10 Networks.” (See Force10 Rakes In $41M and Force10 Gets $75M in Funding.)
That cozy arrangement may remind some of the telecom bubble times, when spreading IPO shares around and having VC portfolio companies use each others' services was common practice.
Force10, for its part, says there's nothing unusual about the relationship.
"If that’s what happened, it wouldn’t be uncommon,” says a Force10 spokesman Peter Ruzicka.
Ruzicka later came back with the following email response: "Vonage is an important customer of ours and, as you know, a leader in the VOIP market. Force10 identified the opportunity at Vonage through the diligent efforts of our New York sales team." (See Force10: Where's the Exit? )
Meritech and NEA partners didn’t return calls and emails Wednesday.
The Force10 router contract is just one of the many nuggets in Vonage’s S-1, which it filed shortly before its May 24 IPO. (See Vonage Gets a Haircut and Vonage S-1 Nuggets.)
Investor NEA owned 29.1 million shares of Vonage stock as of May 23 -- that’s 23 percent of all shares before the IPO and 19 percent afterward, according to the filing. Meritech owned almost 15 million shares as of May 23 -- 12 percent of the total before the IPO and 10 percent afterward.
Vonage used Force10’s TeraScale E-Series routers to build out its network and expand data center capacity in New York, Los Angeles, Pittsburgh, Philadelphia, Nashville, Denver, and Atlanta, according to Force10’s Website. (See Force10 Sets Record.)
NEA and Meritech partners are also active on the boards of the two companies.
“An employee of Meritech Capital Partners and an employee of New Enterprise Associates serve on the board of directors of Force10 Networks,“ the Vonage S-1 reads. Those employees are Meritech founder Paul Madera and NEA partner Peter Morris.
NEA partners Peter Barris and Harry Weller sit on the Vonage board of directors.
Meanwhile, the world is still waiting for Force10's IPO.
The Vonage contract may have been a welcome break for Force10 back in 2004, but $1 million is not a huge deal in the scheme of things. Sources say the company has been doing north of $60 million in yearly revenues, and has been hinting around at an IPO for several months now. (See LR Picks Leading Lights IPO/M&A Finalists.) For those reasons, the company was No. 1 on the Light Reading Top 10 Private Companies list issued in March. (See Force10 Networks Inc. ) Will that No. 1 ranking last? Depends on the contents of the IPO filing, most likely.
— Mark Sullivan, Reporter, Light Reading