Vonage and its underwriters anticipated that some customers might not pay for the shares they agreed to buy in the IPO, the Wall Street Journal reported yesterday. Registration documents filed with the SEC make clear that nonpayment was anticipated, and that Vonage agreed to purchase the shares.
The plan was spelled out in Vonage's registration documents filed with Securities and Exchange Commission before the IPO and before customers started having second thoughts about their agreements to buy shares.
Generally underwriters are on the hook if investors who commit to buying IPO shares change their minds after the stock tumbles. But Vonage, one of the largest Internet phone companies, indemnified its underwriters -- led by Deutsche Bank AG, Citigroup Inc. and UBS AG -- for the portion of its issue its customers agreed to buy, according to the prospectus.
That makes sense. Usually, the risk of non-payment rests with the underwriters since they are responsible for finding and vouching for the buyers. Here Vonage was finding the customer-buyers and these individuals represented a greater risk of non-payment than the typical deep-pocketed institutional purchaser of shares in an IPO.
So is Vonage going to make good on threats to sue its customers to recover money it owes its underwriters?
Fat chance. In the first place, it's not clear that Vonage can sue the customers. The customers didn't actually have an agreement with Vonage--they had an agreement with the underwriters to purchase shares. With no direct agreement to purchase shares between Vonage and the customers, Vonage probably doesn't even have standing to sue.
More importantly, its probably not worth the time, effort or money. Thirteen-and-a-half percent of the IPO was reserved for customers. Doing some rough math (meaning, I'm not busting out the calculator), let's say that comes out to $72 million of shares bought by the customers in the $531 milliion IPO. Now media reports have stated that around 10,0000 customers commited to purchase Vonage shares. Let's say that comes out to an average of somewhere around $7200 worth of share commitment per customer. Since Vonage cannot launch a some sort of reverse class action suit against its customers, it would have to sue them individually. And these lawsuits thingies are expensive, what with having to pay the lawyers and all. Now some people ordered less than average and others ordered more, so maybe if a few individuals with lots of shares reneg on their commitment, Vonage might go after them.
So why is Vonage making threatening noises now? Our commenter BMC gets it exactly right.
What it wants to do is create the impression that those who don't pay up aren't going to get a free ride. Tuesday's stories about how Vonage would eat the costs greatly increased the number of deadbeats who were likely to try to walk away. Vonage is clearly hoping that when it comes to lawsuits, the threat is stronger than the execution, as Aron Nimsowitsch would say.
Nimsowitsch is a famous chess master. When you really want to let people know you are right, quote a chess master.
The point is, Vonage customers=probably unscrewed.