Investors Put Vonage on Hold

Vonage Holdings Corp. said hello to the public markets Wednesday, but all the Internet phone company got back was static from investors.

Shares tumbled 13% on their first day of trading -- making Vonage’s Wall Street debut the weakest so far this year and the worst for any initial public offering of more than $500 million since 2000.

Vonage began sliding within minutes of its founders ringing the opening bell on the New York Stock Exchange amid concerns that the company’s advantage in the rapidly growing online call market would be overtaken as conventional phone and cable providers adopt the technology.

“The initial price did not take into account the early nature of the [Internet telephony] landscape and the threat of competition over the next three to five years,” said Richard Greenfield, an analyst at Pali Research in New York City.

The offering was priced Tuesday at $17, raising $531.3 million for the New Jersey company. The stock closed Wednesday at $14.85. Greenfield said earlier that investors should avoid the stock unless the initial price fell below $10.

Vonage executives would not comment on the offering, citing the so-called quiet period imposed by federal regulators when an offering goes public.

Analysts have long doubted the wisdom of money-losing Vonage -- the nation’s largest Internet calling company -- going public. Vonage lost $85.2 million in the first three months on revenue of $118.9 million.

The company is one of many that use Internet technology to dramatically lower the cost of phone calls. Founded in 2001, Vonage has established a recognizable brand name and a public perception of being an alternative to conventional land-line phone service.

Executives have said they would sacrifice profit to bolster the brand and build the customer base.

In its first quarter, Vonage signed up 328,279 new customers to give it a total of 1.6 million subscribers.

But the technology it uses, called voice over Internet protocol, or VOIP, is now the backbone of phone offerings from cable TV companies. The cable industry is expected to capture more than 15 million customers by the end of 2008, according to industry estimates.

In addition, a glut of Internet phone companies and free and low-cost services from Skype Technologies and others are roiling the industry.

The nation’s phone companies also have rolled out Internet phone services to compete outside their regions.

For Greenfield, who specializes in covering cable firms, “the future holds far too much uncertainty” for Vonage.

The tumult in the industry will make Vonage’s voyage in the public sector “interesting to watch,” said industry analyst Jeff Kagan in Atlanta.

“Telephone, high-speed Internet, television and cellular are the big package of services that the phone company and the cable television company are preparing to compete with,” he said.

With discounts for the package, those industries should be competitively priced, he said.

Verizon Communications Inc., for instance, recently lowered its VoiceWing Internet phone service to $25 for those who also take Verizon high-speed Internet connections. Vonage offers the same service at a similar price but has no other product to make up a package.

Uncertainties like that worried investors. In 89 prior initial offerings this year, the first-day price rose an average of 8.6%, according to financial data provider Dealogic Holdings. Vonage’s performance lowered that average to 8.4%.

The company reserved for its customers 13.5% of the 31.25 million shares offered. But officers and directors still control 60% of the company. Co-founder and Chairman Jeffrey A. Citron holds 33% of the stock; on paper he lost $115.4 million on Wednesday.