Vonage Founder Stands To Profit Despite IPO Flop

By Ari Levy and Miles Weiss
Bloomberg News
Thursday, June 8, 2006

Vonage Holdings Corp. chairman and founder Jeffrey Citron has a paper profit of almost a half-billion dollars -- six times his initial investment in the company -- from shares he bought before the company's initial public offering.

Meanwhile, the value of stock held by new shareholders has fallen 29 percent since the company's IPO on May 23.

Citron, 35, who started the Internet phone company in 2001, invested $81.5 million before Vonage's IPO, allowing him to acquire 47.67 million common shares at an average of $1.71 each, according to documents filed with the Securities and Exchange Commission.

Excluding options, his stake is valued at $571.5 million, based on yesterday's closing price of $11.99 a share. Citron and early investors are eligible to sell stock Nov. 21, 180 days after the IPO.

Vonage spokeswoman Brooke Schulz declined to confirm Citron's paper gain.

"The thing to see is if they all sell after the 180-day lockup," said James Spindler, assistant professor of law and business at the University of Southern California. "That wouldn't be unusual. You have to suppose that Citron is keeping his fingers crossed that things hold up."

Shareholders, including customers, bought stock in the IPO for $17 a share. The decline in the share price has wiped out more than $700 million in Vonage's value.

Vonage, which has been unprofitable since it began offering Web-based phone services four years ago, raised $531.3 million in the IPO.

The money will pay for marketing to fend off competitors such as AT&T Inc. After the company went public, investors focused on the company's $361.2 million in losses in the past three years, turning Vonage's into the worst IPO in six months.

Several analysts said the stock was overpriced by underwriters. Buckingham Research Group of New York, which this week began covering Vonage, rated the stock "underperform" with a price target of $5 a share.

In a note before the IPO, Richard Greenfield, co-head of Pali Capital Inc. research in New York, said Vonage shares should have been priced at or below $10 each.

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