Vonage Shares Take a Wild Ride

The Web-calling company's stock nearly tripled last week as investors bet that potential acquirers are closer to making a play

By Olga Kharif

In the midst of a summer rally for tech stocks, the runup experienced by Vonage Holdings stands out by any measure.

Shares of the Internet-calling company gained nearly 200% the week of Aug. 24, and that's after a 31% drop on Aug. 28, when the shares closed at 1.37. Between Aug. 12 and Aug. 26, the stock rose more than 470%. Vonage (VG) shares have enjoyed a 373% rally so far in August, a month when the Nasdaq composite index has gained just 2.5%.

Shares of Apple (AAPL), Intel (INTC), and Microsoft (MSFT) have risen sharply this summer, but nothing like the climb Vonage has seen.

New FCC Rules Likely

The basics of Vonage's business don't explain the wild ride. On Aug. 5, the company swung to a $2.3 million second-quarter profit as sales fell a modest 3%, to $220 million. The company may be the beneficiary of future Federal Communications Commission rules that make it easier for Web-calling software to appear on mobile phones, but any such regulations would likely not appear before next year. Vonage announced an iPhone application and a cheap international calling plan in recent days, but that also fails to explain the sudden interest in its stock, investors and industry analysts say. "There's nothing based on the fundamentals that suggests this [rally]," says Ronald Gruia, a principal analyst at consultant Frost & Sullivan.

Investors are speculating that potential acquirers are getting out the green eyeshades on Vonage and other Web-calling software companies such as Skype, which owner eBay (EBAY) hopes to sell or spin out. Vonage doesn't deny that it's open to suggestions. "If someone were to approach the company with an opportunity that could benefit shareholders, we would certainly evaluate it," the company told BusinessWeek.com in a statement. One of Vonage's largest investors, Silver Point Capital, declined to comment.

The stock prices of several other public Web-calling companies have risen in recent weeks as well. Shares of Vonage competitor 8X8 (EGHT) have gained 24% since the beginning of August. "I certainly have seen a lot of interest [from potential buyers] given the financial results and valuations in the category," says 8X8 CEO Bryan Martin. But he says 8X8 "is not for sale at these [valuation] levels."

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