The company hopes its CEO's past won't hinder its plan to raise big bucks on the public markets

February 8, 2006

3 Min Read
Vonage Files for $250M IPO

Vonage Holdings Corp. (NYSE: VG) Wednesday filed for a $250 million initial public offering and revealed that it has tapped former Tyco International Ltd. (NYSE: TYC; London: TYI) executive Michael Snyder to replace its long-time CEO, Jeffrey Citron.

Later this month, Citron will become Vonage's chairman and "Chief Strategy Officer." (See Vonage Appoints CEO, Chairman.)

The principal underwriters of the IPO are Citigroup , Deutsche Bank AG , and UBS Investment Bank .

According to the SEC filing, Vonage's largest shareholder is Citron, who with five other institutional investors has invested an aggregate of $394.5 million since the company was born four years ago. More on that in a moment.

Vonage announced its intentions to hold an IPO last year, but the company subsequently held discussions with several potential acquirers. (See Vonage Hearing Buy-Out Bids.) Citron reportedly never heard the Skype-style valuation he was looking for, and now is apparently defaulting to the IPO exit plan. (See EBay Buys Skype for $2.6B.)

Investors have been mainly cool on telecom IPOs of late, and with Vonage’s high marketing costs and low margins, the trend may continue. (See Telecom IPOs Rare in 2005.) During 2004 and the first nine months of 2005, the company spent $232.4 million on customer acquisition. (See BellSouth Launches Residential VOIP.)

Vonage lost $190 million on revenues of $174 million for the nine months ended Sept. 30, 2005, compared to a loss of $43 million on revenues of $50.4 million during the same period in 2004.

The company has 1.4 million subscribers, and consumer acceptance of VOIP is expected to grow rapidly in the next few years. That will help Vonage, which has one of the best-known brands in the space. (See Cable Is the Voice of VOIP.)

Of course, being the best known brand comes with a cost. Between 2003 and 2004, Vonage's marketing expenses jumped by 374 percent, to more than $56 million "primarily due to the increased costs related to online, television, print and radio advertising," according to the company's S-1 filing.

But Vonage faces serious competition from other standalone VOIP providers, incumbent telephone companies that control their own networks, and cable providers that are looking to add VOIP as part of a bundle of services. Vonage, with no video or Internet service offerings, also competes with eBay's Skype unit, which offers free phone calls via the Net to other Skype users. (See Vonage Raises $250M.)

In additon to a broad field of competitors, Vonage has some concerns about current CEO's past.

Citron, while affiliated with Datek Online Holdings Corp., an online brokerage firm, was accused by the SEC of participating "in an extensive fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES," according to Vonage's filings with the SEC. "Mr. Citron and other individuals entered into settlements with the SEC in 2002 and 2003, which resulted in extensive fines, bans from future association with securities brokers or dealers and enjoinments against future violations of certain U.S. securities laws."

This only matters, as Vonage explains in its filings, because Citron's ownership of a large chunk of Vonage -- and his participation in the company as an executive -- have spooked some on Wall Street. "We believe that some financial institutions and accounting firms have declined to enter into business relationships with us in the past, at least in part because of these matters," Vonage states in its filings.

Vonage spokeswoman Brooke Schulz told Light Reading her company isn’t commenting on either the IPO or on Jeffrey Citron’s move from the CEO position.

— Mark Sullivan, Reporter, Light Reading

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