You don't have to pay for your Vonage shares

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Vonage Will Pay Underwriters
For Shares Its Users Don't Want
By DIONNE SEARCEY and IAN MCDONALD
May 31, 2006; Page C3 Wall Street Journal

Vonage Holdings Corp., which just conducted one of the most unsuccessful initial public offerings in nearly two years, has offered an unusual contingency to its underwriters: If the Internet phone company's customers balk at agreements they have made to buy shares, Vonage will cover the cost.

The plan was spelled out in Vonage's registration documents filed with Securities and Exchange Commission before the IPO and before customers started having second thoughts about their agreements to buy shares.

Generally underwriters are on the hook if investors who commit to buying IPO shares change their minds after the stock tumbles. But Vonage, one of the largest Internet phone companies, indemnified its underwriters -- led by Deutsche Bank AG, Citigroup Inc. and UBS AG -- for the portion of its issue its customers agreed to buy, according to the prospectus.

Setting stock aside for customers is an unusual move. Typically IPO shares are bought by deep-pocketed institutional investors and often surge in their first days of trading, making them coveted by Main Street investors.

But Vonage set aside up to 13.5% of its $531 million IPO for its customers, selling to them via email and messages left on voice mail. The idea was to build tighter ties with clients and to create a buzz for the IPO.

That plan backfired when Vonage shares sank after they were initially offered at $17 last week. In 4 p.m. composite trading on the New York Stock Exchange yesterday they were at $12.50, down 52 cents, or 4%, for the day and 26% since their debut.

"Maybe on paper this sounded like a good idea," says Tom Taulli, author of "Investing in IPOs" and an adjunct business professor at the University of Southern California's Marshall School of Business. The move to give customers access to IPO shares isn't common and given Vonage's experience, "it may go from rare to extinct," Mr. Taulli says.

One online forum, vonage-forum.com, had many Vonage customers unhappy with their investments. Greg Foulks was allocated 500 shares of Vonage but now is trying to decide whether he should stop payment on his $8,500 check. He worries the tumult surrounding the IPO could prompt Vonage to scrap the whole deal.

"It's a big mess and we need Vonage to provide some answers," Mr. Foulks, of Columbus, Ohio, wrote in an email. "Meanwhile I'm stuck with a dog of a stock that will likely see $6 in the coming months."

The question now is what happens if investors like Mr. Foulks refuse to execute their trades. In SEC filings, Vonage stated that it "agreed to indemnify the underwriters" in case the customers turned investors fail to pay for and accept delivery of the stock.

If the underwriters seek indemnification, Vonage would likely have no legal standing to sue the investors, according to experts. But the underwriters do have that recourse and could decide to pursue it instead of seeking indemnification.

Vonage declined to comment, citing a legally imposed quiet period following the IPO.

But CNBC yesterday reported Vonage issued the network a statement on Sunday stating that it wanted to avoid "alienating" its customers. If "certain" customers who refused to buy the shares didn't pay, Vonage expects "to repurchase shares from the underwriters if necessary," CNBC reported.


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