Vonage: If Not BellSouth, Then Who, What?
There's a growing amount of buzz amid Rich Tehrani's post that BellSouth may acquire Vonage for US$3.5-billion. Om Malik and Andy Abramson both believe the idea - particularly the price tag - makes no sense at all, and it's difficult not to agree with them. There are several ways to explore the idea. First, the proposed price, which must have been dreamt up by Vonage CEO Jeff Citron or a Wall St. investment banker looking for a summer make-work project. Since Vonage does not disclose financial data, it's impossible to know its revenue, operating income, costs and profits/losses. But let's take a look at publicly-traded 8×8 Inc.'s $101-million market cap based on 57,000 customers. You multiply the subscriber figure by 15 (Vonage has 800,000 customers), and this gives Vonage a value of $1.5-billion. So does this mean Vonage gets a $2-billion premium because it's the market leader with a well-known brand in a market with fierce competition and a soft price environment? I doubt it.
The next question is if BellSouth doesn't buy Vonage, then who/what happens next? Sprint has been rumored as a possible buyer but it just spent $35-billion to buy Nextel. Frankly, I don't see a strategic buyer stepping up to acquire Vonage. The exit route for Citron and his happy band of investors is most likely an IPO but this may not be the best time to tap the capital market. Nevertheless, let's explore possible valuations. So far, Vonage has raised $400-million of venture capital. Let's assume, these investors own 30% to 50% of Vonage. At 30%, Vonage is worth about $1.3 billion; at 50%, it's worth $800-million. Even with investors owning just a 20% stake, Vonage would be worth $2-billion. So where does the $3.5 billion come from? You have to believe it's pure fiction and that something told Rich Tehrani a nice summer story.
