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."

Comments

They might need to delay gratification

[rbanzai]

I hope the bigwigs at Vonage held off on those Ferraris they were planning to buy... :D

Re:They might need to delay gratification

[OlivierB]

Well they may already have. IPO money goes to the company issuing its shares. Once they are on the Nasdaq or NYSE they are on the secondary market; i.e. the shares you buy or sell are traded with the company itself but with some other chap who has the exact opposite view to yours.
Hence those who had their Vonage stock converted in ordinary public shares already sold at $17, if they got ahold of these at lower price (or free as stock options) than they probably already have the Ferrari dealer on their friends list.

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.

What?

[Don_dumb]

I have read TFA, but I still dont understand.

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?
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?

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?

Can someone please clear this up for me?

Re:What?

[spottedkangaroo]

determined their own opening stock price, which the SEC wasn't too happy about.

I don't think it was the sec that had the problem. It was the investment bankers that couldn't make the billion dollars with their investment banker cronies in the usual fasion. The sec is there to protect us not them -- though it usually doesn't really bother...

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.

News for MBAs

[Anonymous Coward]

Stuff that's Boring.

Sued the customers, now sue the owners

[syousef]

This is actually quite funny. I thought it was insane that the MPAA and RIAA were so willing to sue their own customers if they didn't do everything legitimately but this is new: Sue your owners. Now let's get Metallica involved and we should see the comedy skits and cartoons roll across our web pages - it'll be even better than the Napster thing.

Can't wait till a company gets so desperate it sues itself. (I bet it's already happened and I get lots of links).

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.

Re:Sued the customers, now sue the owners

[Don_dumb]

Can't wait till a company gets so desperate it sues itself. (I bet it's already happened and I get lots of links).

It just so happened three years ago, that Fox News attempted to sue the makers of the Simpsons - http://washingtontimes.com/entertainment/20031029- 091743-7849r.htm, both are of course part of the same company.
It just goes to show that too many suits 'Sue first, think later'.

Re:Sued the customers, now sue the owners

[strider44]

Sorry mate but that was a joke by Matt Groening. He only said it in passing and it went around the world before he had a chance to say "just kidding".

Re:Sued the customers, now sue the owners

[nodwick]

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.

A lot of the complaints have centered around the really poor execution of the sale. Shares were supposed to be issued to the buyers at the IPO price immediately, so that buyers could then trade them on the first day. Instead, the underwriters screwed up their purchasing system so that buyers couldn't put stop-loss orders or sell their shares on the way down and limit their losses; instead, the computer system refused to accept sells and forced them to sit there watching the share price fall. Even worse, some buyers were initially told they weren't allocated shares, only to find out at the end of that day that they actually were given shares. (To extend your analogy, how would you feel about initially being told you wouldn't get any shares, then the price tanked, and THEN you were told that whoops, we made a mistake, and we're going to be selling you shares at a 12% markup to the current market price anyhow?)

Note that IPO shares are typically priced slightly below what the company thinks the fair value is, in order to give the initial purchasers a good deal. The more paranoid (cynical?) have suggested that Vonage deliberately overpriced its shares and used its own customers to prop up its IPO price. Given that customer relations for the company weren't stellar to begin with (too many horror stories dealing with their staff), this is going to generate a lot more negative PR with both their current customer base and potential future customers.

Vonage IPO

[JWSmythe]

I hope they don't come after me. I went through their signup, and stopped when I saw the price and the mininum number of shares to buy. I was willing to throw a few bucks into it, but not anywhere near what they were asking for. Stocks are a gamble, and I have my limits. This time, it looks like I made the right choice.

a small mistake at the start?

[EsonLinji]

Aren't stock prices meant to go up after an IPO for at least a few days so the investment brokers can offload the shares at a profit before the stock drops? This seems to have been really poorly organised.

As to the practicalities, if someones signed a contract saying they'll buy so many shares at a certain price, you can't blame the other party for holding them to it, even if they do look like idiots doing so.

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

[ps]

I was part of that IPO as a potential investor. The process was very clear.

*You "read" the prospectus (think EULA "check this box" kind of thing) that warned you extensively about the risk involved. Those risks were very clearly stated.
*You had to read a page on the risks involved, with all of them ending in "and you could lose all the money you invest"
*You created a limited purpose account with a brokerage.
*You were told to read the prospectus again.
*You made a conditional bid in 100 share increments, with the expectation that the price would be between $16-18. You were told that you could drop out at any time prior to the price being set, and that your bid, if accepted, would be binding.
*You were told that the price was about to be set.
*You were told to read the prospectus again.
*The price was set at $17.00
*You were told "The posting of this information and the final terms of the intial public offering constitutes the underwriters' acceptance of your conditional offer to purchase shares of Vonage common stock. Accordingly, you are now obligated to purchase the number of shares you have been allocated, if any."

Having gone through it, I have no doubt that they are on firm legal ground (IANAL). You had to accept (again EULA type) every single step of the way, and every time you logged into the website.

Thank God my bid wasn't accepted!

-ps

Vonage originally offered not to pay

[nodwick]

I submitted a story on this yesterday morning. Vonage went on CNBC Wednesday morning and announced that it "is going to let some of its customers off the hook by buying their unwanted shares." The statement said that "While all avenues are available to us we cannot imagine alienating our customers in that way. If certain . . . customers don't pay we expect to repurchase shares from the underwriters if necessary."

People immediately started pointing out that it is illegal for a compnay to treat different shareholders in the same class differently -- Vonage was only offering to "make whole" (Wall Street speak for "absorb the losses of") investors that hadn't yet paid for their shares; people that had paid were SOL.

The whole IPO has basically been a mess, with snafus both in selling shares to their customers and delivering them. Some Vonage customers that they were led to believe that they "weren't allocated shares in the IPO when in fact they had received the shares. Others investors who purchased shares have complained that technical glitches on a Web site set up for Vonage customers prevented them from executing sales in a timely fashion."

I've had good experiences with the Vonage product as a customer, but there are many, many stories of how poorly Vonage customer service treats their customers. They're very slow in sorting out problems -- it took them 3 months to transfer my land-line phone number, and initially the temporary number they gave me was in a different area code than my city, putting me in a long-distance calling zone relative to my friends. It took hours before they fixed it (they kept claiming it wasn't "technically possible" to give me a new number). Analysts are worried that future propects for the company might not look so good, and that screwing over their own customers in the IPO might be the last straw.

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 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: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: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.

Re:Worst. IPO. Ever.

[alexander_686]

You can not collect the money upfront. Selling new issues of a stock [IPO] is a very strictly regulated process, both in terms of processes and timing. And I am sorry for the people who did not get to trade their stocks the first day. That is sad. However, having worked in the back office of a securities industry, I can so see how this could happen. Getting the shares from the underwriter to an individual account must translate across at least 3 different technology platforms. None of them terribly well integrated or automated. As for the little people who got stung - I have little sympathy for them. IPOs are not priced so initial investors have a sure thing. That is against the law. The company, with the help of the underwriters, must price them fairly. [Though they tend to be conservative and hence low]. The little guys are discouraged from doing IPOs because they complex and can become very messy very quickly. We are talking about a brand new company with no track record trying to guess how much it is worth. If you invest in the stock market, you know that you could lose it all. Doubly true for IPOs.

Re:Let's piss off investors and potential sharehol

[bobwoodard]

Yep, they made you go through multi stage process where they warned you multiple times that you could lose some or all of your money. They also made you analyze your threshold of risk and after all that and a few more dire threats you were given the agreement to puchase an unknown number of shares. It was unknown since the number of share available was dependent on the number of people participating.

You're correct though, you weren't agreeing to purchase the shares before the IPO (since the price wasn't known), you were agreeing to purchase the shares at the opening IPO price.

Since the IPO was pretty bad, you've now got some upset people.