Vonage Hangs up on IPO, Mastercard Masters IPO
May 25, 2006 — -- Vonage Holdings Corp. and MasterCard International Inc. both debuted their initial public offering and the response from investors and Wall Street couldn't have been more different.
Vonage, the provider of Internet telephone service, tanked in the worst IPO in the last two years, while MasterCard had the best in the same period.
As the country's largest provider of Web phone service, investors have been eyeing Vonage for months in anticipation of the company's IPO. But the Street did not receive the company well. Vonage shares fell 13 percent on its first day of trading Wednesday, pressured by investor fears that competitor services like Skype, which plans to offer free calls between the United States and Canada by the end of the year, could eventually compete for Vonage's 1.6 million paying subscribers.
"What looms in the shadow pushed on Vonage. Skype technology did not help either. Investors have to feel they've got a pure play with a proprietary technology. Vonage was the pure play without the proprietary technology," said David Menlow, president of IPOfinancial.com.
Vonage tried to find a buyer, but failed to find one that would pay the company's asking price of more than $2 billion.
Vonage shares (ticker symbol VG on the New York Stock Exchange) closed at $14.85 after the first day of trading Wednesday, down from its IPO price of $17 a share. In the IPO, the company offered 31.25 million shares, or 20 percent of the company's stock, The company raised $531 million in the IPO.
The poor first-day showing adds the Holmdel, N.J. based-company to the hall of shame. Two other companies that tanked on the day of their IPO debut: Lumera Corp, the nanotechnology firm, sank 13.5 percent and Daystar Technologies, the Solar-power-equipment maker, plummeted 48 percent on its debut.
Credit Card Masters IPO
Meanwhile, the IPO for the No. 2 credit card company, MasterCard (ticker symbol MA), received more hopeful sentiment from the Street. MasterCard garnered special attention from the NYSE, which lists MasterCard as its 12th largest domestic IPO listing. Menlow says if it weren't for Vonage going public the day before, MasterCard could have done even better when it debuted Thursday.
"It priced a dollar below its initial pricing, a ripple effect that most likely trickled down from Vonage," said Menlow.
MasterCard shares, priced initially at $39, rose $7.00 -- 18 percent -- to close at $46.00. The IPO raised $2.39 billion for the company.
MasterCard's IPO was an even more successful debut than Google's in 2004, which raised $1.7 billion. Another top IPO this year, Chipotle Mexican Grill, with an initial offering price of $22 rocketed 100 percent to $44 a share.
Despite MasterCard's successful debut, its competitor, Visa International, has said it has no plans to go public.
IMPACT OF DEBUT
But does it really matter how a company debuts? Analysts gave mixed responses on the importance of IPO performance.
"It does matter. A stock could garner the reputation of being another 'Vonage.' People will remember what happened, and people will begin to think the stock is damaged goods. People just say, 'I lost money on that stock, that's all they remember," says Menlow, who has three decades of experience monitoring reactions from investors and the Street.
Andrew W. Lo, Harris and Harris Group Finance Professor at The MIT Sloan School of Management, takes a different stance. While people often make a big deal out of the pricing, Lo says the pricing serves only to create an illusion to the public. And that illusion can become a catch-22.
"If you price it at a really big run-up, then one could say you were doing a disservice. But if there isn't a large run-up in price then people say you've done a disservice."
Either way, people are likely to view the pricing as a disservice in someway. Lo believes it is better to shoot high.
"A stock that opens high walks on rose petals. It will be easier to get people's eyes on the company when a second offering comes out," he says.
Lo points to a lot of academic research that shows a systematic bias that IPOs generally tend to be underpriced. But when it comes to trying to pinpoint what Vonage could have done differently, Lo says pricing a company's IPO is a lot more straightforward than many make it out to be.
"There's always a 20/20 hindsight, but really two things drive IPOs: the economic climate and the emotional psychology the company captures in the imagination of the public," said Lo.
That imagination of the public is precisely what MasterCard was able to capture.
Citigroup Inc., Goldman Sachs Group Inc., and HSBC Holdings PLC are underwriting MasterCard. Deutsche Bank AG, Citigroup Inc., and UBS AG managed Vonage's underwriting.