Tuesday, March 27, 2007

Vonage - Will They Sell at $3.22/Share?

Did the title of this post get your attention? Well, it got mine. Earlier today, fellow blogger and aspiring game-changer, Moshe Maeir put up a post with a title similar to this.

Actually, Moshe is offering to BUY Vonage - that's right - take it off their hands at that price.

Provocative? Yes.

Cheeky? Well - that's how another fellow blogger, Ken Camp, described it in his post about it.

Far-fetched? Not really.

Moshe is basically arguing that Vonage's price will never be higher, and if you strip away the bad and only keep the good, there's a great business waiting to be fixed. Ken seems to agree, and is ready to pony up right now.

Well, there's no shortage of Vonage bashers out there, and you don't have to look far for all the death-watch and takeout scenarios that other smart industry watchers are touting. Both Earthlink and Sprint-Nextel have been mentioned as possible buyers. Russell Shaw thinks they'll go private. I think they'll go to Verizon. Any of these scenarios are possible, and I hate to say it, but not even a year after their IPO, Vonage's survival prospects are at a low point right now.

So, is this a time be buying or selling? I don't agree with Moshe that their share price will never be higher. Things don't look great right now, but the patent lawsuit is far from over, and if they can get through the next couple of weeks and come up with a workaround for the patents in question, things can certainly get better.

I'm drawing attention to Moshe's post primarily because it's one of the few I've seen that support some of what I've long been saying. On more than one occasion, I've tried to focus on the good things about Vonage, often against the tide of popular sentiment that seems to take pleasure in writing Vonage off. Several of my Vonage posts and interviews with the media are certainly critical, but I think I'm pretty fair and balanced.

It's very easy to focus on a broken business model, the lack of recent innovation, the out-of-control marketing spend, and the futility of competing head to head against the big guys and the bundles. All of these are certain recipes for failure.

However, if you look at Moshe's prescription for what he'd do to make the patient well if he were King, it speaks to the underlying strengths that could be the foundation for a money-spinning business. As I've noted in earlier posts, they've got a critical mass of subscribers, a brand name in VoIP that's second to none, substantial revenues, attractive gross margins, tons of money in the bank and very little in the way of direct, apples-to-apples competition. It's pretty clear to me that if you could just keep that, you've got the foundation of a great business.

Take your pick - the glass is half full or half empty. Moshe thinks it's half full, and is willing to put his money where his mouth is. Will Mr. Citron take Moshe up on his open letter offer? I don't know, but I'm just glad to see somebody else come out and say this is not a lost cause. Vonage may have seen its best days in its current form, and clearly something has to give here. At their current stock price, you just have to think there's value to be had, but I think it all comes down to how confident Vonage's management team is in their ability to turns things around.

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