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The recent Vonage (NYSE:VG) IPO is sign that the IPO market has wised up since 1999. I'm sure that Citibank (NYSE:C), the lead underwriter for the offering, was thinking of H. L. Mencken's famous quote:

No one in this world has ever lost money by underestimating the intelligence of the great masses of the plain people.

Sadly for Citibank, the great masses were not interested in owning shares of a cash burning company that faces total destruction of its business model. Even after getting the customary IPO discount, and the option for over allotments, Citibank has lost money on this one. But Vonage will also lose money on this IPO.

13.5% of the shares in the offering were reserved for Vonage customers who were induced to directly purchase shares. These customers will not be amused after losing 25% of their investment in two days. They'll dump both their shares and their subscription to Vonage.

The fundamental problem with Vonage is that their business model of selling a VoIP tap is nearing expiration. And even worse, the company itself is not profitable and does not have a clear timeframe for becoming so. Between free PC Phone software and VoIP services from telcos and cable companies, Vonage is stuck between a rock and several hard places. The private equity sponsors realized that Vonage was about past the sell-by date. And so they sold out, leaving public equity investors holding the bag.

I would not be surprised if there is a class action lawsuit. That lawsuit will probably be dismissed because of the prospectus disclosures. If Citibank/Vonage are smart, they will give Vonage customers an option to sell shares back for the IPO price. An expensive option, but cheaper than getting exercised on a lawsuit.

Source: Vonage's IPO Flop: Bad For Subscriptions As Well (VG)