On Wednesday, Vonage Holdings (VG) said that customers who reserved shares in the Internet phone company's initial public offering last week must pay for their stock, despite the fact that the shares have lost 29% of their value since the offering. Previously, the company had suggested it might not force customers to pay for their shares, since doing so could alienate them (see BW Online, 5/31/06, "Trouble on the Line for Vonage?").
In the weeks before its IPO, Vonage took the unusual approach of allowing customers and other people close to the company to reserve shares without putting down any money. They weren't required to pay for the shares until May 30, six days after the May 24 IPO. By the later date, Vonage had established itself as the worst-performing IPO of the year. Shares, which were originally priced at $17, had tumbled to $12.50 by the close on May 30, and slipped again yesterday, to $12.02. Many customers now appear reluctant to pay the original price for their shares.
TOUGH TALK. As of Friday, only 40% of the 9,000 customers who reserved shares in the IPO had paid for their stock, according to a person familiar with the matter. It wasn't clear how many of the 4.2 million shares in the directed-share program (DSP) reserved for customers and other people close to the company had been paid for. But the company indicated that it expected all transactions to be completed. "If customers reserved shares in the DSP, they are obligated to pay for those shares. To be clear, we are not buying back shares from customers or letting anyone off the hook or creating two classes of shareholders," says Brooke Schulz, a Vonage spokeswoman. "If they don't pay, we are reserving our right to pursue payment."
The company has agreed to indemnify its underwriters if customers don't pay for shares that were reserved. The underwriters include Deutsche Bank (DB), Citigroup (C), and UBS (UBS). That means Vonage will let banks off the hook while it collects money from its customers. That could create a public relations problem, or even encourage customers to drop the service. Analyst Richard Greenfield of Pali Research warned in a note that the IPO could lead to customer defections. Such churn, as it is known, is a common measure of performance in the telecom industry.
But those problems would pale in comparison to the legal ramifications if Vonage were to buy back shares from some investors and not others. Institutional investors who took a beating on the IPO purchased the same class of shares that individual investors purchased. If customers were allowed to renege on their decision to reserve shares, institutional shareholders could pressure Vonage for the same treatment.
The five-year-old company has about 1.6 million Internet phone lines (see BW Online, 5/24/06, "Vonage's Lackluster IPO"). Customers can use a combination of regular phones, adapters, and broadband connections to create a cheap alternative to regular phone service provided by traditional phone companies like Verizon (VZ) and AT&T (T).
IPO GLITCHES. .Some customers are upset with Vonage's IPO process. Mike Luzopone, 43, said he tried to reserve 100 shares earlier in May. He says that when he checked the Vonage Web site the evening of May 23, the night before the IPO, he was told he hadn't been allocated any shares at all. He said he was upset and called to complain.
That distress gave way to relief the following day when the shares tanked. But he says he received a "reminder" several days later that he owed $1,700 for 100 shares. "Believe me, I would never screw anybody. If I had bought the shares, I would have paid for them right away," said Luzopone, a New York City fireman who works at Ladder 118 in downtown Brooklyn. Luzopone said he would cancel his Vonage service if he was forced to pay for the shares. "They better straighten this out, or I'm history," he said.
Another customer said that the process of reserving shares was unclear. Jim Sullivan, 38, an individual investor and software salesman who lives in Johns Creek, Ga. (a suburb of Atlanta) said he tried to reserve 5,000 shares, the maximum in the DSP program. He said he was offered 1,300. The company says he and other customers must pay for those shares, but Sullivan says he doesn’t think he should have to. "But there was no confirmation process. It was just a click-through agreement. You have to sign more agreements to get cell-phone service. I have participated in other IPOs and this isn't usually the way it works," he said. The company said it had no immediate comment on the complaints about the IPO process.
Vonage was hoping for a big public-offering payday, even though it's never made any profit (see BW Online, 2/9/06, "Vonage's Iffy IPO"). Now, regardless of who ends up paying for the unclaimed shares, it appears that there won't be any real winners in this IPO.
Rosenbush is a senior writer for BusinessWeek Online, based in New York
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