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Business: Vonage is a assortment of three predominant companies: (i) the legacy shopper VOIP enterprise; (ii) Application Programing Interface (API) enterprise, which helps corporations talk to their prospects by textual content messaging and (iii) Cloud-based Enterprise Communication as a Service enterprise (CaaS).
Stock Market Value: $3.6B ($14.48 per share)
Percentage Ownership: 3.91%
Average Cost: n/a
Activist Commentary: Jana Partners is a very skilled activist investor with a lot success in the Information Technology business. Jana’s common 13D returns in this business common 36% versus 10.72% for the S&P 500 over the identical interval.
On Aug. 31, 2021, it was reported that Jana Partners is pushing Vonage Holdings Corp. (VG) to discover strategic alternate options, together with a sale of all or a part of the corporate.
Jana initially disclosed its place in Vonage in its 13F final quarter and disclosed in its most up-to-date 13F that its place elevated from 2.31% to 3.91%. The alternative right here is to create value by optimizing the asset combine and refining the portfolio or promoting the corporate.
The legacy Vonage enterprise is a low a number of, slowly declining enterprise that constitutes the smallest a part of the value of the agency (with $284 million of income), however it’s what the corporate is understood for. This considerably and adversely impacts the corporate’s total valuation by dragging down the valuation of its most engaging property. The API enterprise has roughly $550 million of income and is considerably undervalued by the market as a part of this firm. The closest pure play enterprise to that is Twilio Inc. (TWLO), which trades at 19x income. Applying simply a 7x a number of to Vonage’s API enterprise would give that enterprise alone a valuation of $3.85 billion, which is equal to the enterprise value of all the firm. If that a number of received wherever shut to TWLO’s 19x a number of, the current valuation of Vonage begins to look actual foolish. Moreover, the CaaS enterprise has actual value as nicely with roughly $500 million of income. Its friends RingCentral and 8×8 commerce at 12x income and 4x income, respectively. Granted that Vonage’s CaaS enterprise would most likely commerce nearer to the 4x a number of, however that offers it one other $2 billion of value on a firm that presently has a whole enterprise value of $3.85 billion. While the legacy Vonage enterprise is the least invaluable of the three, administration has projected that it’s going to generate $600 million of money move over the subsequent 5 years, and just lately introduced the termination of a gross sales course of for that unit, which announcement despatched the corporate’s inventory value down by 12%. Finally, the corporate additionally has roughly $760 million in internet working losses it may well use to protect earnings over the longer term.
Realizing the true value of those property is just not an operational problem, however a strategic one. Operations and administration are usually not issues right here — the corporate just lately turned over its administration workforce and has had six quarters of excellent earnings in a row. The low cost right here is due to market notion and portfolio construction. Accordingly, the best way to maximize value right here is for the corporate to have interaction an funding financial institution to conduct a thorough strategic evaluate to unlock shareholder value.
There are definitely many good explanation why these companies ought to be separated in some method. A sale of the legacy Vonage enterprise wouldn’t solely generate money for the corporate, however would doubtless lead to a re-rating of the a number of for the remainder of the enterprise that may create shareholder value in addition to make the remaining firm a extremely enticing acquisition goal. Moreover, a standalone API enterprise wouldn’t solely have a a lot greater a number of, however it might decrease the corporate’s value of capital nearer to its friends to allow it to higher compete for M&A alternatives. Alternatively, a strategic evaluate could lead to a sale of all the firm at a premium to personal fairness, who could do the strategic work themselves to create further value.
This is just not the primary latest activist marketing campaign at Vonage. Legion Partners can also be concerned right here (see Noteworthy Activist History) they usually settled for a board seat. Legion mentioned in an investor letter dated Oct. 12, 2018 that they imagine the corporate’s shares ought to be price $39 by the top of 2020 versus $14.16 at Sept. 30, 2018. However, the inventory has not moved a lot above this stage. Having Jana concerned now could definitely be useful because the agency could be way more aggressive than Legion. That’s as a result of not like Legion, Jana is just not at present sure to standstill restrictions. We count on Jana to proceed to advocate for a strategic evaluate and imagine the corporate shall be receptive to these overtures. If not, beginning on Feb. 3, 2022, Jana could make director nominations to enhance the strain they exert on the corporate.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.