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What's Up With Force10's Vonage Deal?

As Vonage Holdings Corp. (NYSE: VG) shares plummet rapidly toward single-digit midget status, it's interesting to find another IPO prospect -- Force10 Networks Inc. -- linked to the poorly performing IPO in the Vonage prospectus. (See Sources: Force10's Prepping Its IPO.)

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

Scott Raynovich 12/5/2012 | 3:52:44 AM
re: What's Up With Force10's Vonage Deal? So how's life at Force10 these days?
MaybeMe 12/5/2012 | 3:52:44 AM
re: What's Up With Force10's Vonage Deal? LR has these kinds of reporters? Nothing useful to publish, wasting time, theirs and ours. Discussing the ins & outs of a meager $1M deal between related parties, what an original research project. Tell me who are Force10's biggest customers, and if all those deals are fake. Is Vonage their only customer?

Vonage must have bought the gear on merit for the good of their own business, and if they got a reference from a known entity, nothing wrong with that. Thats how we all do all deals, through references. You guys better publish something useful, and cut the crap.
russ4br 12/5/2012 | 3:52:42 AM
re: What's Up With Force10's Vonage Deal? 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.GÇ¥

MaybeMe says: a meager $1M deal

Well, a $0 dollar deal is even meager!

Vonage won't be a reference for long, anyways ...

-russ




slideruler 12/5/2012 | 3:52:42 AM
re: What's Up With Force10's Vonage Deal? I believe that MaybeMe's point was that this kind of story impresses as the equivalent of the tabloid stuff one would see in checkout aisles (except for telecoms)....like Jessica & Nick with routers. No industry reputation building for LR going on here...I'll take a pass on this genre.

On the kudos side, I have noted marked improvement in the latest LR pieces - recognizable third party input and perspective along with solid reporting, good balance.

SR.
Larry, Monkey 12/5/2012 | 3:52:40 AM
re: What's Up With Force10's Vonage Deal? I see ghosts everywhere.
Alpine 12/5/2012 | 3:52:40 AM
re: What's Up With Force10's Vonage Deal? Do you at LR guys see ghosts when you drive past cemetaries?

There's nothing wrong with companies doing business with each other just because there are related parties on the board. It just needs to be properly disclosed - which it appears to have been done. Besides Vonage needs to get ethernet switching gear somewhere now doesn't it...
laserbrain2 12/5/2012 | 3:52:39 AM
re: What's Up With Force10's Vonage Deal? the more interesting question is how is anyone going to make any money on a Force10 IPO? Here's my SWAG:

NEA owns 25%, and the six other VCs average maybe 10% each. So that's 85%.

And let's say they do $80mil this year (we'll be generous). Other smallish networkers trade at 1-4x sales. (we won't even ask for profit). So that's $300mil valuation. That's a nice exit if you raised $30mil. But they've pulled-in, what, $350mil?! This company doesn't go out without a $1bil price tag.

(as an aside - Figure top management has 10%. So that means the rest of the schmucks, err employees (few hundred?) share 5%, ugh.)

So there's no way they go public on $80mil in revenue. My guess is it would have to look like this:
2005:$60mil sales
2006:$120mil
2007:$200mil
2008:aiming at $300mil. Mid 2008 IPO and hope the market is there. Also hope you don't need any more cash between now and then. And if they pull it off, then they deserve that valuation.

Conclusion: LR bought into the rumors spun to push acquirers so no one has to go through that marathon/sprint before liquidity.
f10rules 12/5/2012 | 3:52:23 AM
re: What's Up With Force10's Vonage Deal? Life at Force10 is same old, same old. Only the VP of Backplane, Director of MAC flooding, Director of TCL scripting, and Director of LC are happy. And of course, the oversized director that manages all these directors. The rest of us are are getting tired of this tribal management style, the bigger (physically), the more superior. I hope we can IPO in 3 months or so.
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