When is Vonage a good acquisition target?

Andy says Vonage’s best move is a sale.

That may be true, from Vonage’s perspective, but let’s look at the numbers. At a stock price of around $3/share, the market cap of the company is roughly $500MM, or about the same as the cash they have in the bank. At that point, $750MM looks like a “steal” for the company. However, none of the problems with the Vonage business metrics go away with a new buyer. The fundamental issue comes down to churn and customer acquisition costs.

If one simply buys the business for the 2.2 million customers, how much are they really worth? Hypothetically, if we spend no marketing money to replace customers, and assuming churn remains about the same, all the customers are gone in about 2 years and the total revenue collected is under $100MM (and all the key value assets are out the window). This says that VG is worth no more than $100MM over their cash, less debt and other liabilities. I.e. the actual customer base is only worth about $100 million.

As a growth business, there is no ‘there’ there because every customer Vonage adds reduces the value of the company based on their historical metrics. No one in this replacement VoIP or PoIP business has shown a viable NPV model. So why would anyone want to pay more than 1.0 times revenue for such a business?

And none of this factors in the ongoing patent and other legal liabilities. Toss this in, and maybe even 1.0 times revenue is too much to pay for these 2.2 million customers.

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