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.

1 comment for “When is Vonage a good acquisition target?

  1. Hi Mr. Blog,

    Sorry for my late reply, I know the article has aged…but I’m sure you will agree still very relevant. If we see the value of Vonage only as revenue, then indeed you’re correct. However telecoms spend around $250-300 per new subscriber account, at least this is what I read. But if the figure is correct, Vonage subscribers (2.5M as of 09-01-2009) are worth between 625 and 750 million dollars to potential buyers (very conservative estimate). Now that is only cost of new telecom subscribers; what if potential buyers like TW and Comcast can covert Vonage subscribers to bundle accounts that cost $120+ per month? Easy to see we’re talking big, big, big money. Of course the trick for Vonage is to hold on to existing accounts and show decent growth numbers. I believe Vonage is trying to make itself as pretty as possible for potential buyers; 3rd quarter report will tell us whether Vonage is pretty enough. That is how I see Vonage.

    Now, if readers can afford the risk, couple things to keep in mind; as of Sept. 9. 2009 VG share price is $1.35, Vonage Holdings Corp.3Q Earnings Release is scheduled for 11/02/2009 * 18:00ET Q3 2009. Notice the time; 2 hours after closing of normal market hours and 2 hours before closing of extended trading hours. If the news is good for Vonage then extended hours trading will take all the gains before normal hour trading starts.

    Just for the record, I own shares in Vonage, and my investment is only rolling the dice for chance to make big money. To all readers, please do not let my opinion influence you into taking risks you cannot afford.

    Regards, John Debba

Comments are closed.