Vonage loses fans with IPO

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Vonage is good at signing up consumers for its money-losing phone service. Vonage also proved adept at selling those same consumers its money-losing stock. That creates a problem, for Vonage managed to use its IPO to turn happy customers into disgruntled shareholders.

Vonage pitched customers a deal: Get the stock at the initial-public-offering price. The Net phone service set aside as much as 13.5% of stock for customers; about 10,000 took the bait.

Vonage came out the door May 23 at $17 a share and sunk below $12 by the middle of last week. Investors immediately took to Web message boards, claiming they were duped.

Some customer-investors may refuse to cough up cash for their shares. In pre-IPO filings, Vonage said it would indemnify underwriters if customers failed "to pay for and accept delivery" of stock. In a statement to CNBC early last week, Vonage said, "we cannot imagine alienating our customers." But late May 31, Vonage said it isn't offering refunds; customers are stuck with the stock.

To be sure, Vonage encouraged customers to read a prospectus full of red flags. First, there's the boss: Chairman Jeffrey Citron paid the SEC $22.5 million to settle fraud charges at his old online brokerage, Datek, and he's barred for life from working on Wall Street. Then there's the business: Marketing last year consumed 90 cents of every revenue dollar. It's like the old days of dot-coms, which at their bubble peak poured an average 94% of revenue into sales-and-marketing expenses.

Vonage, which says it's the largest ad spender on the Internet, plans to use a huge chunk of IPO cash for marketing to buy more growth in the emerging Net phone market. Losses to date: $467 million. "We may never achieve profitability," the prospectus warns.

There's nothing wrong with converting customers into investors; AT&T, McDonald's, Procter & Gamble and Wal-Mart all sell stock directly to consumers. But it's unusual and risky for a company to solicit customers to buy its IPO. In doing so, Vonage damaged its image, and it now is paying the consequences.
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