Mon. Dec 6th, 2021

Vonage’s entry into the public markets 15 years ago was a failure. Its outcome will be much more pleasant.

On Monday, telecommunications equipment titan Ericsson said it would obtain Vonage at an enterprise value of $ 6.2 billion. The takeover price is more than five times where Vonage traded at the beginning of 2015.

The company showed up just after the dotcom boom. It has become known as the power behind VoIP voice over internet protocol, which shifts landline phone calls to the internet. But a messy listing and a money-burning business model that did not anticipate the iPhone cellular revolution left the company nearly bankrupt.

In 2006, it sold shares to the public, including some of its clients, at $ 17 a share. On the first day, its share price fell by more than a tenth, suggesting its upcoming problems. In 2009, Vonage shares traded at less than 50 cents. The hype about VoIP faded as Vonage was thriving customers and has faced lawsuits over patent infringement by people like Verizon.

But a few years ago, Vonage turned away from consumers to businesses, offering them a way to modernize their communications for a digital world. The timing was perfect given the explosion in general IT outsourcing. The pandemic was another blessing that forced companies to adapt to remote labor forces.

However, Vonage’s legacy business exists a lot today. Like AOL’s dying dial-up Internet service, VoIP remains highly profitable. Even if revenue drops 15 percent each year, its ebitda margin is a high 65 percent. By 2021, essentially all of the company’s projected $ 200 million ebitda will come from its consumer business.

The business has achieved break-even profitability while growing by about 20 percent annually. Even if it is assumed that Ericsson does not attribute any value to the consumer business, it implies that the 2021 revenue multiple paid on the business unit is less than six times. Vonage’s competitor Zoom trades at 25 times revenue while RingCentral is at around 15. Sometimes it’s worth it to stay on the line.

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