☁️ Does Vonage’s Acquisition Give Ericsson The Mojo?

HP zooms on demand; Gap, Nordstrom tumble afterhours.

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☁️ Vonage: A New Er(a)’icsson’?

New Jersey-based cloud communications provider Vonage Holdings Corp. (VG) will be acquired by Swedish telecom equipment maker Ericsson (ERIC) for $6.2B. That’s a 28% premium to Vonage’s Friday closing. The premium on offer made at least one set of shareholders a happy lot. (Tweet This)

Controversy’s Child

Vonage was founded as Min-X.com by Jeff Pulver in 1998 as a Voice over IP (VOIP) exchange and adopted its current name three years later in 2001. The company first offered subscription services in the United States and expanded to Canada in 2004 and the UK in 2005.

Vonage went public in May 2006 and raised $531M through its IPO, selling shares at $17 apiece. However, it was one of the worst IPOs of the year, falling 12.7% on its trading debut. Before the IPO, the company sold shares to its existing customer base.

These customers lost money in the IPO and promptly filed a class-action lawsuit against the company. In June 2006, Verizon filed another lawsuit against Vonage, stating that the company infringed on five of Verizon’s patents related to its VoIP services.

It took three years for Vonage to settle the case with the retail investors in its IPO. In 2009, claims of all shareholders against the company and its directors were dismissed, and Vonage paid $3.6M through an insurance policy to the aggrieved investors.

Separately, the firms that managed the IPO, including Citigroup, UBS, and Deutsche Bank were fined a total of $845K and ordered to reimburse these IPO investors for inadequate communications. Regulators also probed a possible short-selling angle with regards to the listing day fiasco.

In the Verizon case, a jury found Vonage liable for infringing three out of the five patents held by Verizon. Vonage was fined $58M, including a royalty rate of 5.5% of every sale to a Vonage customer to Verizon. Multiple appeals later, Vonage finally agreed to pay $120M in damages to Verizon.

A 15-Year Full Circle

Vonage pivoted towards a Unified Communications as a Service (UCaaS) model as the rise of Android, iPhone, Skype, and even WhatsApp put pressure on the margins of voice calls. This platform includes voice services, video chat, and web collaboration, reducing overall communications costs while enabling interoperability across devices.

To expand its presence in the UCaaS space, Vonage acquired Telesphere for $114M in November 2014 and Simple Signal for $25M in April 2015. These deals added business phone services, multi-point video conferencing, and a nationwide cloud platform to Vonage’s services.

Today, Vonage’s communications platform contributes ~80% to the overall topline. Total consumer subscriber lines stood at 807K at the end of Q3.

Enter Ericsson, which was looking to expand its presence in the wireless enterprise and broaden its global offerings after becoming the unwitting victim in the cold war between China and the West. Vonage’s well-oiled communications platform seemed like an asset that couldn’t be passed over!

Ericsson will pay $21 per share to acquire all Vonage’s outstanding shares, a 28% premium to Vonage’s Friday closing price. The deal is Ericsson’s largest in many years and is expected to close in the first half of 2022, subject to shareholders of Vonage and other regulatory approvals.

Vonage will become Ericsson’s wholly-owned subsidiary but will continue to operate under its brand name. If Vonage’s shareholders vote the deal down, it’ll have to pay a break-up fee of $61M. If, for whatever reason, Ericsson is unable to pull off the acquisition due to regulatory concerns or a higher bid coming in from other players, Ericsson will be liable to pay $200M in reparations.

Before the deal was announced, Vonage’s shares were languishing at the IPO price from 15 years ago – this after a 55% rise YTD. No wonder Vonage’s shareholders were cheering the deal as the stock jumped 27% yesterday. On the other hand, Ericsson’s shares fell 7% as its shareholders fretted about the soundness of the strategy. Either way, Vonage seems to be at an exciting vantage point!

Market Reaction
VG ended at $20.63, down 0.77% after Monday’s 27% jump.

Company Snapshot 📈

VG $20.63 -0.16 (0.77%)

Analyst Ratings (13 Analysts) BUY 8%  HOLD 92%  SELL 0%

Newsworthy 📰

Turnaround: HP shares jump after earnings beat, CEO says return to office driving PC demand (HPQ +7.49%)

Defence: Gap CEO defends air freight investments despite margin hit, says its about competing for holidays (GPS -16.21%)

Headwinds: Nordstrom shares tumble as earnings fall short, hurt by higher labour costs, weak Nordstrom Rack sales (JWN -23.18%)

Later Today 🕒

  • Deere & Co. Earnings (DE)
  • 7:00 PM IST: Initial Jobless Claims
  • 8:30 PM IST: Core Inflation
  • 12:30 AM IST: FOMC Minutes

Today’s Market Terminology: Book Value

Book value of a company is the company’s equity value as reported in its financial statements. It is calculated by dividing the common stockholders’ equity less the preferred stock, divided by the number of common shares

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