Vonage Vows to Pursue Customers Who Renege on IPO

kamikaze-Tech writes "As its shares continued to sink following its initial public offering last week, Vonage Holdings Corp. (VG) said it plans to hold Customers who promised to buy IPO shares to their pledges. In a WSJ article posted in the Vonage Forums; a Vonage spokeswoman said Wednesday the company will pursue payment from customers who renege on their agreements to pay for the botched IPO shares. Shares of Vonage, which offers Internet-based phone service, immediately plunged from the $17 IPO price, and they closed Wednesday at $12.02 in 4 p.m. "If they don't pay, we will reserve our right to pursue payment," said Brooke Schulz. She added that speculation that the company intends to buy shares back from disappointed investors are false. "They are taking a risk if they choose not to pay," she said."

Let's piss off investors and potential shareholder

[Enderandrew]

Let's piss off investors and potential shareholders. Better yet, while we're at it, can we get some bad press and announce to the rest of the world that everyone wants to back away from our stock?

People love investing a pariah stock that reeks of desperation.

Re:Sued the customers, now sue the owners

[gowen]

Re: vonage: there's nothing weird about sueing someone who breaches a contract (even a verbal contract) with you.
Why would it matter that the contract is about share deals, or anything else?
Can you imagine how the prospective buyers would react if the shares had shot up, and Vonage management had said that they'd decided to sell them at the higher price?
If you want to become a stock market speculators, you have to learn to cope with the fact your going to be wrong sometimes, and suck up the loss you take.

Is relief in sight?

[tm2b]

I don't care, so long as Vonage stops those freakin' annoying commercials. They're like when a three year old gets a hold of phrase they like and won't stop repeating it. I mean, yeesh. I can be three rooms away from the TV and nearly be irritated out of my skin by those things.

Vonage *may* be justified in doing this..

[leeum]

I originally thought this was a bit of extremely bad PR at first. When thinking about this further, I do believe that Vonage might have a justification for insisting payment.

I couldn't find any information about the IPO price-setting process in the United States but I am assuming (call it an educated guess) that, at some point prior to the IPO, Vonage must have announced to all participants in the IPO a confirmed price per share: in this case, $ 17 per share. It would then make sense to me that Vonage would be obliged to give participants the option of dropping out, or confirming that they are still interested in purchasing the shares.

Assuming all the above is true, I would think that, at the date of the IPO itself, purchases are contractually obliged to purchase those shares at $ 17 per share and pay up. The article seems to imply that the investors are now balking on their contractual obligation and refusing to pay up given that price per share has fallen in subsequent days.

However, I have not been able to find any evidence to suggest that Vonage has been unfair in its IPO process. Of course, as this story pans out, we may actually hear from some of the individuals involved.

I did, however, find an early SEC filing related to this auction, available here [sec.gov].
This filing doesn't seem to give any information about the proposed initial price, but I thought it was interesting that the company did disclose that theirs was a high risk stock, and listed several risk factors that could negatively impact the value of their stock.

Re:Let's piss off investors and potential sharehol

[gowen]

So, if you were a potential investor in Vonage, you'd be happy if they just let people back out of their legal obligations, regardless of any financial damage to the company itself?

You have strange ideas about responsible corporate governance.

Re:Vonage *may* be justified in doing this..

[Anonymous Coward]

Yes, Vonage's position is completely justified in this case. Anyone who bought into the Vonage IPO got exactly what was coming to them. The company was so desperate to sell shares that it actually sent messages to its customers [slashdot.org] in the days immediately beforehand, practically begging them to take its shares. If that didn't raise red flags for you, then good God, what the hell are you doing in the financial markets at all?

Re:Let's piss off investors and potential sharehol

[Andy_R]

This isn't going to piss off investors or potential shareholders, it's good for them.

What's better for investors, Vonage sitting on unsold shares with a paper value of $12.02 each or Vonage having $17 cash in the bank?

The more shares Vonage sells for $17, the more money it makes, and the more valuable it is as company, which should mean the shares go up. Good for investors, good for potential shareholders.

The only people this is bad for are the gamblers who agreed to pay $17 for something that turned out to be worth $12.02.

Re:What?

[Marsala]

Does this mean that people have promised to buy shares at an agreed price, but because the price has already dropped they will not actually buy those shares?

Basically, yes. Part of the registration for participation in Vonage's IPO was that you agreed to purchase a set amount of shares at $17. Now that the price is less than $17, it'd cost them money to fulfill this agreement, so they (understandably) want out of it.

If so, how did they 'promise', if they have done so in writing, then surely Vonage can demand they do buy those shares at that price?

Basically, Vonage has got their consent to the online form and the fact that they had to open up a brokerage account to participate as proof that the people entered into the agreement knowingly. There were warnings in the agreement about this situation happening, but most folks probably assumed that was just boilerplate (nevermind the fact that there's a reason that boilerplate is included in the first place).

Or is this a case of a company mucking up a floatation, realising that it is now massively in debt to external creditors and is trying to reclaim that money by threatening people?

I don't know if it's so much that Vonage is in debt as it is that the first sale of its stock during the IPO is how the company raises money from the IPO. Vonage's standpoint here is "You promised to give us $500 a week ago and we're going to hold you to that promise even though you were expecting to make $600 back and now instead will only be able to make $300 back. The $200 loss is your problem, not ours."

A class act would forgive the customers and offer to either release them from the agreement or offer them a chance to change the terms to something that won't cost them money. Aside from being a decent thing to do and aside from being a good way to prevent a bunch of customers from churning over this, it also would make the company look less desperate and maybe help stop the downward spiral the stock price is currently in.

Underwriters will sue the customers

[rabun_bike]

The customers who bought stock prior to the opening bell on the first day did so at a guaranteed price. They purchased the stock not from Vonage but from the underwriters who financed the IPO deal and brought the Vonage stock to the open NASDAQ market. These underwriters are owed the money for the stock purchased. Vonage is indemnifying the underwriters and paying for all the Vonage stock that customers are refusing to send their money for. The underwriters are the ones that are out money - not Vonage. They are the ones harmed by customers refusing to pay for the IPO they ordered. Vonage has a huge public relations problem on their hands. Don't expect any other companies to do this in the future.

http://blogs.zdnet.com/ip-telephony/?p=1106 [zdnet.com]

Re:What?

[edxwelch]

The underwriter company that does the IPO guarantees that there will be buyers at the agreed price. Usually they are big clients of the underwriter and they make a pile of money on the IPO, becuase normally a IPO stock shoots up and they in at a price that the normal investors can't buy.
In this case the IPO actually went down, so it looks like these same investors want it both ways, to make piles of money when an IPO is sucessful and take no risk when a IPO tanks.

Re:What?

[Stone Pony]

"A class act would forgive the customers and offer to either release them from the agreement or offer them a chance to change the terms to something that won't cost them money"

Alternatively, you could argue that a class act would stop bleating about how his "can't miss" money-making proposition didn't work out the way he'd hoped and pony up the cash that he'd freely agreed to pay.

Just a thought. I don't really care one way or the other, but it would be nice to see someone standing up for the notion of personal responsibility.

It's called a contract...

[SilentJ_PDX]

Why are all the posts here so negative about Vonage? Maybe it's a bad PR move, but they are definitely justified.

Everyone that signed up agreed to buy the stock despite incredibly dire warnings on the signup screens that the price may go down. If customers wanted to buy the stock only if it went up, they should have bought options [wikipedia.org].

Re:Let's piss off investors and potential sharehol

[bastion_xx]

Commitment to the shares required various steps which were clearly stated that if you sign up, you are responsible for the shares no matter which way they went (up or down). I think Vonage, or the institutions that performed the IPO should go after those that committed to the shares.

As part of the process they gave an estimate for the float price and cautioned that you should have X funds ready to send. I guess the real question is was there enough information during the signup process to authenticate the person and informing them of the rules of the IPO. I would think so, but then again, IANAL.

I looked into the IPO as I qualified and actually committed to a certain amount of shares. However, after speaking with investor friends, they recommended staying away from the IPO for various reasons. I went back to the site and retracted my offer. So I'm not on the hook for these shares.

Worst. IPO. Ever.

[Paradise Pete]

What a disaster.

Vonage decides to "let the little guy in" by offering shares to customers. But it makes the huge blunder of not actually collecting the money, letting the customers merely agree to buy. These are, for the most part, unsophisticated investors who think that getting in on an IPO means free money, and that they always go up.

Now that the opposite has happened these "investors" not only want to walk away from the deal, they want to cancel their service! Here's what one participant said: " I have had enough of this company, refuse to pay for these shares, and am canceling my Vonage service, not because it is not a good service, just because i have lost all faith and trust in this company. "

Leaving aside any questions of his logic or good faith intentions, Vonage has dug themselves a huge hole and jumped right in. And it's going to get worse before it gets better. The only way these people can try to get out of paying is by canceling the service. So sooner or later Vonage is going to have to consider sucking it up and "forgive" all those promises to buy in order to keep their customers. But if they do that the stock plummets, and here comes a class-action lawsuit from the stockholders.

Underwriters should have required $ up front!

[Bubba]

... Like Deutsche did for the VA Linux IPO. The money for the shares was required to be sent to them beforehand and be in the account prior to purchasing the IPO shares. I guess Vonage didn't have enough time to require this and preferred fast-tracking their IPO. Looks like the number of IPO shares sold looked a whole lot better on paper not requiring the money up front.

Re:Vonage originally offered not to pay

[tessaiga]

Is it you, or Vonage, or both, that seem to be confused over the concept that, Victor Kiam notwithstanding, although customers may also be shareholders or potential shareholders, i.e, investors, and vice versa, they are not the same thing.

Actually, you're the one that's confused here. If you're RTFA in the parent post, it would have told you that this whole debacle started when Vonage decided to offer shares of the company to its customers at the IPO price. If you were an existing customer (as I was), you received an email about a month back telling you about the pending IPO and offering to let you buy shares.

Internetoutsider.com [internetoutsider.com] has a good outline of the chain of events:

The company reserved about 14% of its IPO shares for its customers. In other circumstances, this might be seen as a perk: Buy the service, get hot stock. In this case, however, at least in the early going, it's proving to be an efficient way to engender widespread customer frustration.

At this writing, Vonage customers who took the company up on its offer have lost 15% of their money. Some of them, presumably, are now selling their stock to non-customers who were savvy or fortunate enough to wait until the stock started trading. Even if the stock recovers from here, Vonage customers will no doubt remember that they could have done better. And if the stock continues tanking...well, then, even Vonage customers who love the VOIP service will feel nothing but bile toward the company.

[...]

Given the difficulty Vonage had generating institutional demand for its IPO (witness the tanking stock), a cynic might suggest that the apparently customer-friendly IPO gesture was actually just a savvy capital-raising move: "Our customers don't know jack about IPO valuations--so let's sell 'em stock!" Or, perhaps, Vonage is just so confident in the future of its company and stock price that it is sure its currently chagrined customer-IPO-buyers will be grateful later.

In any case, if the stock stays in the tank, it will be interesting to see how many customers quit Vonage's service because they have lost money in Vonage's stock.

Re:Vonage Sucks, period!

[jhribar]

Ever consider the fact that all the numbers you blocked on your old provider were now unblocked and that's why you got flooded? Sounds like your old number is the problem, not Vonage. IMHO.