Initial Public offering Vonage

Initial Public Offering

FIN 325: Financial Analysis for Managers II

(FAC)

September 11, 2005

Initial Public Offering

Introduction

Vonage the worlds leading provider of Voice Over Internet Protocol telephone services began in 2001, by 2002 they had their first residential customer. Vonage's decision to expand and acquire a larger customer base led to their IPO in May 24th, 2003. The difficulties faced by Vonage are no exception, many companies struggle with the decision of going public and timing. The loss of some control and the requirements can deter some companies from taking that leap, as is illustrated each step in establishing an IPO below.

Registration, Disclosure, and Compliance

In accordance with the Securities Act of 1933, Vonage could not make any offers to the public prior to a registration statement being filed with the SEC. The offer is not limited to actually offering the sale of stock, but includes any communication to the public that could alert the stock market or prematurely getting attention from the public. If for some reason, any information is leaked prior to the registration with the SEC, Vonage's IPO could be delayed until the SEC decides the market excitement has subsided, which could lead to lost opportunities for both the company and investors.

As part of the registration process, Vonage as well as any other company filing with the SEC is required to comply in several areas including description of the company's properties and business profile i.e. any changes in financial position, results of operations, liquidity, capital resources, seasonality, etc., a description of the security to be offered for sale, including the risks that could apply to the success of the security being offered. Additionally, the Vonage provided information about the management of the company, consisting of the track record of the leadership and current focus on filling any known management gaps. Finally, full disclosure of specific financial data, including 2 years of audited balance sheets and 3 years of audited income statements, which have been certified by an independent certified accountant.

Cost of Issuance

In financial markets, stock is the capital raised by a corporation through the issuance and distribution of shares. The price at which investors buy stock when they are first issued is the issued priced (cost of issuance). An organization, which holds share of stocks, is called a shareholder. The aggregate value of a corporation's issued shares is its market capitalization (http://en.wikipedia.org/wiki/Bond_(finance)).

The owners of a company may want additional capital to invest in new projects within the company. The company may wish to reduce their holdings, freeing up capital for their own private use. By selling shares, a company can sell part or all of the company to many part owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends (http://en.wikipedia.wiki/Stock).

There are several types of stock: 1) common stock - the most usual and commonly held for of stock in a corporation. Shareholders of common stock have voting rights incorporation decision-making; 2) preferred stock - have priority over common stock in the distribution of dividends and assets. Preferred stock provides no voting rights in corporate decision matters; 3) dual class stock - shares issued for a single company with varying classes indicating different rights on voting and dividend payments; and 4) treasury stock - shares that have been bought back from the public.

In 2003, Vonage cost of issuance was approximately $15.00. Today (as of September 8, 2006) is down to approximately $8.00. Vonage has seen some difficulty since it went public in 2003. Vonage incurred significant operating losses since their inception. Even to the point where it may make one wonder why anybody would want to invest in the company.

Because of these operating difficulties, Vonage has generated negative cash flows and has accumulated a deficit of $467.4 million as of March 31, 2006. Vonage primary sources of funds have been proceeds from private placements of their preferred stock, a private placement of convertible notes, operating revenues and borrowings under notes payable from their principal stockholder and Chairman, which were subsequently converted into shares of Vonage preferred stock.

Some of the reasons for Vonage's drop in stock cost is lawsuit filed by Sprint Communication Company (October 2005); lawsuit filed by Rates Technology Inc. (October 2005); lawsuit filed by Barry W. Thomas (December 2005); marketing expense increases; past SEC actions against Vonage founder and Chief Strategy Officer (January 2003); and past NASD disciplinary actions (1994) (http://www.lightreading.com/document.asp?doc_id=95766&print=true).

Impact of Ownership Control and Return

Vonage will be subject to even greater scrutiny and criticism as a public company than as a private company. Loss of ownership control of an IPO is a disadvantage because shareholders now own the company; however, most are not involved in its management. When a company goes public, the possibility exists for additional dilution of control through ensuing public offerings and acquisition. Management has less control over day-to-day operations when the holdings of the company's original owners are diluted. Large shareholders may seek representation on the board and a say in how the company is run. If enough shareholders become disgruntled with the company's stock value or future plans, they can stage a takeover and oust management (Encyclopedia of Business, 2006.). Due to loss of ownership control, decisions are not made as quickly and efficiently because the board must approve all decisions.

The SEC regulations restrict the ability of a public company's management to trade their stock and to discuss company business with outsiders. After a company goes public, insiders deal with bringing in new players; therefore diluting their ownership interest and losing in any case a measure of control over the path that the corporation finally follows. Public scrutiny resulting from disclosure of a company's