I think Vonage would be a great acquisition for one of these companies looking into expanding into VoIP. They have an established platform that is one of the best out there (and I’ve tried quite a few). I’ve been excited about Vonage’s product since way before it was getting buzz in the Wall Street Journal, and was one of their first customers. It will be interesting to see what happens.
Net-Phone Firm Vonage
Gives Mixed Signals
By SHAWN YOUNG
Staff Reporter of THE WALL STREET JOURNAL
November 3, 2005; Page C1
Vonage Holdings Corp., a pioneer in selling Internet-based telephone service to consumers, is sending mixed signals to Wall Street.
Vonage is both preparing for an initial public offering of stock that could raise as much as $600 million and exploring selling itself to a larger company at a price that could top $2 billion, according to people familiar with the matter.
Venture investors, including Bain Capital, 3i Group PLC, Meritech Capital Partners, Institutional Venture Partners and New Enterprise Associates, have poured $408 million into Vonage, of Edison, N.J., and are likely ready to start collecting a payout.
These investors can hope for a hefty price tag because Vonage is a leader in Internet voice, a technology that enables phone calls to be made using Internet technology for lower costs and with more features than traditional phone service.
Vonage’s hopes got a lift in September when eBay Inc. agreed to pay $2.6 billion for Skype Technologies SA, a Luxembourg Internet calling company whose revenue of $7 million last year is a fraction of Vonage’s. But there is a chance Vonage could fall short of that mark because several potential acquirers seem more interested in developing their own versions of the service than in making a costly acquisition.
Internet calling, a threat to the conventional phone business, works by transforming voice into data and beaming it along the Internet like an email or photo. The service requires customers to have a high-speed Internet connection, which most people get from their phone or cable company. Vonage’s customer roster of more than one million subscribers has more than doubled this year and the company continues to advertise aggressively, so revenue is likely to continue growing quickly in the near future.
Vonage’s fastest route to a big payday would be to sell itself to one of the cable, Internet or telecommunications companies that have been scrambling to get into the technology. The Skype deal proved that companies are willing to pay handsomely for a head start. Skype, which is primarily used by consumers sitting at their computers talking to one another free of charge, appealed to eBay largely because it would enhance eBay’s core Internet auction business. Even so, many analysts and investors questioned the high price.
It is far from certain that a suitor would pay a comparable sum for Vonage or that its big IPO — which is being underwritten by Deutsche Bank AG, UBS AG, Citigroup Inc. and Bear Stearns Cos. — would be smooth sailing.
“I think it’s not the most appealing business model in the world,” said Rob Bartolo, co-manager of the T. Rowe Price Media and Telecommunications Fund. “It’s a business with limited barriers to entry and falling prices.”
Vonage’s business model is more like a conventional phone company and could appeal to an acquirer seeking a steady revenue stream. Consumers pay the company about $25 a month for a way to plug their phones into high-speed Internet connections. While the company doesn’t disclose financial results, some estimate that revenue is coming in at a rate of about $300 million a year. Vonage so far has moved faster and been more successful in promoting the service than rivals, including cable companies and AT&T Corp.
But many of the most obvious phone and cable company buyers for Vonage are quickly rolling out their own Internet phone offers, as are Internet companies such as EarthLink Inc. and Yahoo Inc. Large telecom and cable companies also can bundle Internet calling with high-speed Internet and TV services, something that Vonage can’t match.
Also perhaps ominous for a Vonage IPO is that a smaller Internet phone company that went public yesterday, Cbeyond Communications Inc., twice cut its offering price. The IPO was priced at $12, down from an original range of $16 to $18. Cbeyond’s stock didn’t gain in its first day of trading, and closed at $12 a share in Nasdaq Stock Market trading.
Investors could give a Vonage IPO a similar reception.
“Skeptical is a good characterization of my view,” said Michael Mahoney, a partner at EGM Capital LLC, a hedge-fund firm based in San Francisco. Vonage’s growth has been impressive, Mr. Mahoney said, but its service isn’t unique and it doesn’t yet have the sheer size that has proved to be crucial in the phone business
On the acquisition front, Vonage so far this year has held exploratory talks with several potential suitors, including Sprint Nextel Corp. and T-Mobile USA Inc., a unit of Deutsche Telekom AG, according to people familiar with the matter. Traditional media companies and Internet players also have expressed interest, these people say.
None of Vonage’s discussions with prospective buyers have reached an advanced or exclusive stage. They could fizzle over price, as talks with Sprint Nextel did several months ago, say people familiar with those discussions.
In recent weeks, rumors have circulated that BellSouth Corp., which provides conventional phone service in the Southeast, was courting Vonage. A BellSouth spokesman declined to comment directly on the speculation, but said the company plans to launch an Internet phone service later this year “and it will not be with Vonage.”
A deal with Vonage could make sense for a wireless carrier such as T-Mobile that is seeking to expand its presence and has no conventional phone business that is threatened by Vonage. T-Mobile held exploratory discussions with Vonage earlier in the year, according to people familiar with the matter, but it isn’t clear if the company still has an active interest.