Vonage Sucker Punch

I wrote this for Om Malik's site GigaOm on May 16. SkypeOut just went free in North America. I figured it was someone at Ebay trying to kill the Vonage IPO.

This is a classic high stakes Wall Street sucker punch...F-ing brilliant. I’d like to shake the hand of the person that thought this out. Citigroup, Deutsche Bank, and UBS now have to work a lot harder to sell this deal. Boo-hoo.

Man, did I catch some heat. Almost 50 comments later, lot's of them personal, swearing that the Vonage deal was oversubscribed, telecom execs were begging to get in, institutions were all over it, Skype is for geeks and Vonage is grandmother friendly. jm or jj is still insisting this is the greatest IPO ever. Does he work for the company? The underwriters? The investors? Whatever.

Only the syndicate guy at lead manager Citigroup knew what the order book looked like. These guys always like to hint that its a hot deal to suck in more orders. 13.5% of the deal was reserved for Vonage customers, the poor schnooks.

Here's how not to do a deal. Citigroup raised the number of shares in the deal, but not the price. Bad move - it signaled some weakness. Worse was pricing it at $17, the mid point of the $16-18 filing range. It broke price in the first few minutes and then broke the bottom of the range in the first hour. Citigroup got paid their 7% fee, Vonage got their money to live another year or so, but now its a broken deal. Citigroup may be mopping up by buying shares. They almost have to - to get the egg off of their face.

Comments

[Bill Burnham]

Still, gotta hand it to Citi for getting the deal done in this tape and in the face of some serious negative publicity, not to mention your sucker punch. One can only hope the syndicate desk was smart enough to be short 100% of the shoe out of the gates and smart enough again to stand back and let it trade down to $15 before mopping up. I wouldn't want to be taking calls from PMs on that desk though...

[Jason Wood]

Andy,

It was an excellent call and, hype aside, obviously you weren't alone in your analysis. The interesting aspect of this deal is that shorts aren't in the name yet, at least not in volume. There was virtually no stock to borrow today (I know, I tried).

Jason

[anskil]

Can Citi really be short their own deal before it trades? Wouldn't somebody have to own the shares before it could be shorted?

[George Chuang]

"13.5% of the deal was reserved for Vonage customers, the poor schnooks".

That must be a record in allocation. That book must have been so weak. Wow. I guess Citi is propping it up at 13. I wonder how long that will last.

Excellent call. I can't believe that Vonage would resort to socking their loyal but not necessarily market savvy customers with this loss. It is sure to have some repercussions.

As for the sales desk answering calls. Hey, that's what juniors are for right? :) I guess they will make it up with Yankee tickets....

[Jan Henneli]

Never trust a broker !!!

[Michael Urlocker]

Andy: I always appreciate your candid comments and you were on the money about the sucker-punch. Skype clearly threatens the value of the Vonage VoIP offer because 90%+ of Skype customers pay zero per month.

But here's a derivative question: If we look at either of Vonage or Skype, do these companies serve as good role models for other would-be market disruptors?

Telcos live in fear of cheap VoIP, so there is something there. And the companies have a new business model (no legacy network) which is good.

So we ran Skype and Vonage through our Disruption Scorecard and they both seem to have pretty big deficiencies, with Vonage earning a 'C' and Skype earning a 'B'.

Key issues for Vonage:
Vonage is not creating a new market;
Vonage is not demonstrating and standing on unique attributes;
Business model looks like a dotcom: high growth now, worry about profit later.

As a former Wall Streeter, I'd be curious what you think of the Disruption Scorecard we put together as a quick-check kind of tool.

Can be downloaded at www.OnDisruption.com

Mike

[thelittleendian]

All I would say is Skype found a sucker in eBay - they stuck 2.6 B to them. Vonage found their own suckers in their customers, underwriters, employees and anybody els e who reached for their wallet. In the socio-economic realm, one happens to be more morally/ethically tolerable than the other.

Whats eBay making by giving Skype calls for free? Whats the monetary effect of adding Skype to eBay's trading platform - where is the ROI? One could say Skype is eBay's turret and the eBay's ROI is long term. One could also say, Vonage is mom-n-pop's family/SB PBX/Fax machine and their ROI lies in cash-flow. Multiply mom-n-pop by a couple million and rising and you have a long term number to chase.

Big difference - you short eBay not Skype, so Skype doesnt get the blame. You have nothing else to short but Vonage - and Vonage gets the blame. Its all fair game.