Vonage Drops 12.6% on Debut Day


Vonage Holdings Corp. priced its much-anticipated initial public offering Tuesday night at $17 per share, raising about $531 million, but the stock was hammered in its first day of trading Wednesday, at one point falling off more than 14% ($2.51 per share) from its opening price.

Vonage had said last month that it would price the 31.25 million-share offering (about 20% of outstanding shares) at $16-$18 each. While the opening price was in the middle of that range, investors apparently believed it was a little too high.

The stock rose as high as $17.25 per share, but it quickly fell to as low as $14.49 each before closing at $14.85, down $2.15 each or 12.6%.

At the $17 opening price, Vonage was valued at about $2.6 billion. By the end of the day, that market capitalization had dipped to $2.3 billion.

It was the worst opening-day IPO performance since nanotechnology firm Lumera Corp. dropped 13.5% in its first day of trading in July 2004, according to The Wall Street Journal.

Part of the problem could be the precarious situation in Internet phone calling -- a market full of large and small competitors and characterized by brutal price wars.

Also adding to the uncertainty is the checkered past of Vonage founder and chief strategist Jeffrey Citron.

Citron was fined $22.5 million by the Securities and Exchange Commission in 2003 relating to his involvement with online brokerages Datek Securities Corp. and Datek Online Holdings Corp. While Citron admitted no wrongdoing, he was barred from being associated with any securities broker or dealer.

While he is not banned from running Vonage, the VoIP provider admitted in its IPO filing that Citron’s past history could spook some potential investors. In its February prospectus, Vonage said some financial institutions and accounting firms have declined to do business with it because of Citron’s checkered past.

While Vonage has about 1.6 million customers -- adding about 200,000 subscribers between February and April -- some analysts cautioned that the main factor that drove those customers to Vonage in the first place, price, could drive them away again.

In a research report earlier this month, Pali Research media analyst Richard Greenfield recommended not participating in the Vonage IPO until the stock price fell below $10 per share. Greenfield worried that the voice-over-Internet-protocol phone-service provider would not be able to maintain its price points and that management’s focus on the Vonage brand and customer loyalty may be misplaced.

“While Vonage management focuses on the strength of their brand, we are concerned that the driving force that led its subscriber base to take Vonage in the first place was price,” Greenfield wrote. “In turn, we are concerned that to maintain its customer loyalty and grow subscribers, Vonage will need to reduce its pricing.”

That may be harder to do, Greenfield added, as the elimination of one free month of service for new customers, coupled with a 99-cent charge to offset the cost of emergency-911 service, may actually boost Vonage’s prices.