Vonage IPO starts rough

Internet phone company's shares tumble 12.6% in first day's trading

other firms' offerings take off

May 25, 2006|By BLOOMBERG NEWS

NEW YORK -- Vonage Holdings Corp. shares fell 12.6 percent yesterday, the worst debut in six months, after the money-losing Internet phone company's $531.3 million initial public offering.

The drop was surprising, considering that pre-IPO demand for the stock had appeared healthy. Vonage's 31.25 million shares sold in the middle of the expected range of $16 to $18 each.

But the company's difficulty yesterday seemed to move against the grain of the overall IPO market. MasterCard Inc., which is going public today after pricing its shares at $39 apiece last night, and 86 other companies that listed for IPOs in the United States have raised about $21 billion this year, 59 percent more than a year ago. Bank of China Ltd. raised $9.73 billion yesterday in the world's biggest IPO since 2000.

"With valuations as high as they are, you're starting to see more companies file," said Ben Holmes, who monitors initial stock offerings at Morningnotes.com in Boulder, Colo. "We might see a pickup in the pace between now and next year."

The Bloomberg IPO index, which tracks the performance of new stocks within 12 months of their first trades, has risen 12 percent this year, compared with a 1 percent advance in the Standard & Poor's 500 index. Last year, the IPO index dropped almost 10 percent through the third week in May as the S&P gained 1 percent.

Chipotle Mexican Grill's shares Inc. doubled on their first day of trading in January after a $173 million IPO. Now, they've almost tripled, making Chipotle the top-performing IPO this year.

Other shares that made their debut this year include shoemaker Crocs Inc., which has gained 26 percent, and investment firm Thomas Weisel Partners Group Inc., which is up 47 percent.

James DeStefano, an IPO analyst at Renaissance Capital, said the market appeared to be focusing yesterday on the long-term risks to Vonage's business model, which involves heavy spending on advertising to draw customers. The company has been unprofitable and doesn't expect profits anytime soon. At the same time, competition is increasing.

The stock opened close to its IPO price, then quickly dipped, which panicked some investors, he said. "I think you've seen a lot people get spooked by how it's trading," DeStefano said.

Vonage attracted 1.6 million subscribers by being among the first to offer Internet phone service, racking up $361.2 million in losses. The company faces increased competition from larger companies such as AT&T Inc. and Comcast Corp., a threat analysts said may have concerned investors.

"This is a company that is losing a tremendous amount of money," Kathleen Smith, founder and principal of Renaissance Capital, said in an interview yesterday. "They're buying their way into the business."

Vonage shares, trading under the symbol VG, fell $2.15 to close at $14.85 yesterday on the New York Stock Exchange, after falling as low as $14.49. On Tuesday, Vonage sold 31.3 million shares, or 20 percent of its stock, at $17.

The decline was the biggest since China's Vimicro International Corp. dropped 16 percent in its November debut.

Citigroup Inc., Deutsche Bank Securities and UBS Investment Bank arranged the sale. Spokesmen for those entities either declined to comment or didn't return calls. Calls and e-mail sent to Vonage officials Mitchell Slepian and Chris Murray, founder and Chairman Jeffrey A. Citron, and Chief Financial Officer John S. Rego were not returned.

"The market is pretty brutal today for a company not making money," said Francis Gaskins, president of IPOdesktop.com. "Vonage is losing too much money," he said. An analysis on Gaskins' Web site suggests that Vonage shares are overpriced at $17, because that values Vonage's customer lines at $1,657 each, eight times the cost of acquiring each one.

Still, the IPO market isn't close to its 2000 peak, when 169 companies raised $36 billion through mid-May, even though some had little or no track record. In 2000, eMachines Inc. raised $180 million with a prospectus that told investors that the marketer of low-priced computers had never made money in the 15 months after it was founded.

The difference this year: Brand names like MasterCard and Burger King, which raised $425 million last week.

Sixty percent to 70 percent of companies going public these days are profitable, the reverse of 1999 and 2000, when three-quarters were unprofitable, said Smith of Renaissance Capital.

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