Vonage and Its Weather Vane Moment

And new CEO Mike Snyder was most recently president of ADT Security, which according to The Wall Street Journal "was the major contributor to accounting errors at Tyco that totaled $2 billion." Of course, Snyder wasn't implicated in any wrongdoing at Tyco, but somehow that's scarier: The unit he managed toppled a corporate giant -- and he had nothing to do with it. Can that be called management?

What's more, Vonage spent more on marketing alone -- $176 million in the first nine months of 2005 -- than it made in total revenue ($174 million). Knowing that, do you remember seeing a Vonage ad last year?

But the really troubling thing for investors has received little attention: Last December, less than two months before Vonage filed for its public offering, the company sold $250 million in convertible debt to select investors, including private firms like New Enterprise Associates and Bain Capital, as well as, yep, Jeffrey Citron.

That's in addition to the $389 million in debt Vonage previously issued in the form of redeemable convertible preferred stock. Each of those earlier preferred shares converts into eight common shares, the S-1 filing says. Meanwhile, Vonage is paying about 5% interest on them.

The prospectus also notes that, "Our stock price may decline due to sales of shares by our other stockholders" and that "convertible notes contain provisions that could delay or discourage a takeover attempt." In other words, the $639 million in convertible debt that Vonage has racked up to post a cumulative $305 million in operating losses could prevent a takeover and then cause the stock to fall when insiders sell.

If that doesn't raise the hair on your neck, try this: Vonage says, "We may need to seek additional funding by accessing the equity or debt capital markets." Reasonable enough, but wait: "Our significant losses to date may prevent us from obtaining additional funds on favorable terms or at all ... We do not fit traditional credit lending criteria ... the terms of our senior unsecured convertible notes contain significant restrictions on our ability to raise additional capital."

That's all from the same paragraph. This is not standard boilerplate for the "risk factor" section.

Yet in the end, there's hope for Vonage. The success of the IPO will have less to do with its prospectus than with Wall Street's mood of the moment. One would hope the spirit of sobriety of the past five years will continue to prevail, which means Vonage will quietly dip its head back into the fertile soil of private financing. The groundhog sees its shadow, and it flees.

But there's a chance that won't happen: We all know that, on Wall Street if nowhere else, sobriety isn't permanent. If the institutional investors decide it's been a long time since it rock-'n'-rolled at a Bacchanalian orgy (as sordid and bloody as that last one turned out) this IPO will get the OK.

And then it will be up to Vonage to keep the wine flowing.

>To order reprints of this article, click here: Reprints