Tuesday, May 30, 2006

Vonage IPO

So, seeing as everyone has been talking about Vonage's IPO, I figured I'd spare you all the trouble of doing the same. That was before I saw this article on Motley Fool.

What? Most successful? Ok, first, a recap for the technically challenged: Vonage, the celebrated broadband phone company (i.e. calls over the internet), went public last Wednesday at the price of $17 per share, and then immediately fell to below $13, where the price sits now.

As a side note, wow. Looks like the underwriters really dropped the ball. As I've been introduced to the world of selling your soul, I mean investment banking by my esteemed colleagues at the University of Wharton, I mean Pennsylvania, I find it funny that some of our brightest young minds at Citigroup (and others) messed this one up. And $17 was middle of the range? Baloney.

For weeks now we've been reading about how Vonage is doomed. Operating losses. Skype taking over. No future. No hope. (Another side note: to quote the President in the movie Independence Day, "Isn't it amazing how quickly everyone can turn against you?" Weren't we sitting here talking about Vonage as the next Google last year?) So how did this happen?

But wait, Bill Mann of the Motley Fool argues, who really lost out in all this? The investors did. Not Vonage. Incredible. They squeezed more money out of this IPO than they were worth - they convinced the public that they were worth $600 million more than their current valuation of $2 billion, a whopping 30%. Or to put it more eloquently, as Mann does,

I stand in awe of this level of salesmanship. I'll bet they [the Vonage guys] are high-fivin' all around in the executive suites in Holmdel. After all, they took a company that has lost nearly half a billion dollars from its inception (with more than 25% coming in the last three months alone), $250 million in debt, and no clear plan to profitability, and they turned it into a mid-cap.

Which brings me to my ultimate (and fortunately, last) point: is overvaluation necessarily a bad thing? From this standpoint, the guys at Google are probably kicking themselves. $85? All that lowering of the opening price, from somewhere in the 100s to 95 to 85? How much cash did they lose out on? Knowing what we know now, they could have set their IPO twice as high, or more! Throwing it way back, what if Netscape wasn't valued so low when it had its IPO. They crossed 400 early on, much like Google, and probably could have fetched a higher IPO price, in hindsight. Maybe they could have withstood Microsoft's onslaught with all that extra dough (yeah you're right that's unlikely).

But still, it's funny how these things play out. In the end, underwriters have to maintain their reputation, and can't monkey around, and yada yada yada, so it renders this all moot. But it makes you wonder, is it really better if your IPO is undervalued, or overvalued? Why do we celebrate the Googles of the world, who really just lost out by undervaluing, when their stock takes off right after the IPO? Just how different is reality from our perception?


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