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Sloan Sessions: Vonage IPO

Scott Jagow Jun 5, 2006

Sloan Sessions: Vonage IPO

Scott Jagow Jun 5, 2006


SCOTT JAGOW: Internet phone provider Vonage has a bit of a PR problem. First the company recommended that its own customers buy shares when it went public last month. The stock immediately tanked and has lost almost a third of its value. But Vonage said folks would still have to follow through on their promise to buy the stock. Now, those customers are suing. Newsweek’s Allan Sloan is with us. Good morning, Allan.

ALLAN SLOAN: Good morning Scott

SCOTT JAGOW: Isn’t it a little unusual to ask your customers to buy shares of your stock?

ALLAN SLOAN: Well in the case we’re talking about I think Vonage would argue that they were committing their customers to buy stock and they were doing them a favor in trying to bind them closer to the company by letting them own a piece of the action and presumably profiting from the pop in price that an IPO’s supposed to get.

SCOTT JAGOW: Some favor.

ALLAN SLOAN: Well, you know, if the stock had gone up 30 percent instead of down 30 percent we’d be having a different conversation.

SCOTT JAGOW: Why do you think the stock did tank so quickly?

ALLAN SLOAN: There are two possibilities. One is that the market just changed. The other possibility is that somebody actually went and read the stock offering documents, which I did after the offering started falling apart but before it came out.

SCOTT JAGOW: And what did you find?

ALLAN SLOAN: Well what you find is this company, which is you know a great name and an image and a pioneer, it’s running through cash at an enormous rate with enormous marketing expanses and it really needed a whole slug of money to keep from running out of cash. Now I’d like to think that this happened because of some sort of rational analysis. I suspect that what happened is that a lot of people buy these IPOs assuming that they’ll run up and they can make a quick buck, but the minute it starts to falter people just dump it, cut their losses short and run. So instead of like say the Google IPO which ran up and ran up and ran up and had a momentum of its own, this one ran down and ran down and ran down and had a negative momentum of its own.

SCOTT JAGOW: So when a company says ‘here buy our stock’ and then it goes directly in the toilet, what responsibility, if any, does the company have for letting these people off the hook?

ALLAN SLOAN: Well I suspect that’s going to be litigated. Something like $75 million of the $500 million and change that was raised in this IPO was apparently bought by customers of Vonage. So I don’t know how many of them have paid, how many of them intend to pay, what Vonage is going to do to enforce payment if they don’t pay. And this by the way is another example of the risk actually companies run by appealing to their customers, because if the IPO goes bad and the customers don’t want to pay, you’ve got a real mess because you may have to sure your own customers, which is generally not good for making them customers.

SCOTT JAGOW: Allan Sloan is the Wall Street editor for Newsweek. In Los Angeles, I’m Scott Jagow. Thanks for listening.

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