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Company: Vonage Holdings Corporation (VG)
Business: Vonage is a collection of three main businesses: (i) the traditional consumer VOIP business; (ii) the application programming interface (API) business, which helps businesses communicate with their customers through text messaging, and (iii) cloud-based business communication as a business enterprise. services (CAAS).
share price: $ 3.6 billion ($ 14.48 per share)
Activist: Jan Partners
Percentage of ownership: 3.91%
average cost: n / A
Activist comment: Jana Partners is a very experienced and very successful active investor in the information technology industry. The average 13D return to enter this industry is 10.72% versus 36% on average for the S&P 500 over the same period.
What is happening?
On August 31, 2021, it was reported that Jana Partners was pushing Vonage Holdings Corp (VG) to explore strategic options, including selling all or part of the company.
In the wings:
Jana initially disclosed her position in Vonage in her 13F last quarter and revealed in her most recent 13F that her position fell from 2.31% to 3.91%. The opportunity here is to create value by optimizing the asset mix and refining the portfolio or selling the business.
The legacy Vonage business is a less multifaceted, slowly declining business that makes up the smallest part of the company’s value (with $ 284 million in revenue), but that’s what l he company is well known. This significantly and negatively affects the overall valuation of the company by lowering the valuation of the most attractive assets of the company. The API business generates approximately $ 550 million in revenue and is undervalued by the market as part of this company. Its closest net business is Twilio Inc. (TWLO), which trades at 19 times its revenue. Simply applying the 7x multiplier to Vonage’s API business would give that company a valuation of $ 3.85 billion on its own, which equates to the enterprise value of the entire company. If that multiplier comes close to TWLO’s 19x multiplier, Vonage’s current valuation starts to look really silly. In addition, there is also a real value of CaaS business with around $ 500 million in revenue. Its RingCentral and 8 × 8 counterparts are trading at 12x revenue and 4x revenue, respectively. Granted, Vonage’s CaaS business will likely trade closer to a 4x multiplier, but that adds up to $ 2 billion worth of a company that currently has a total enterprise value of $ 3.85 billion. Although Vonage’s historic business is the least valuable of the three, management estimated it would generate $ 600 million in cash flow over the next five years and recently announced the end of the sale process for the Vonage. entity that made the announcement. A 12% drop in the price sent to the company’s shares. The bottom line is, the company has a net operating loss of around $ 760 million that it can use to protect its profits going forward.
Understanding the true value of these assets is not an operational challenge, but a strategic one. Operations and management are not a problem here – the company recently changed its management team and has had six consecutive good quarters. The discount here is due to market sentiment and the structure of the portfolio. As a result, the way to maximize value here is for the company to bring in an investment bank to do a thorough strategic review to unlock shareholder value.
There are certainly many good reasons why these companies should be differentiated in one way or another. The sale of the old Vonage business will not only generate cash for the business, but will likely result in a re-valuation of the multiple for the rest of the business, which will create shareholder value and the rest of the business. an attractive acquisition. In addition, a stand-alone API company will not only have much higher multiples, but it will also lower the cost of capital of the company closer to that of its peers so that it can better compete for merger opportunities and acquisitions. Alternatively, a strategic review can sell the entire company at a premium to its private equity, which itself can take strategic steps to create additional value.
This is not the first recent activist campaign at Vonage. Legion partners are also involved here (see history of Notable Workers) and they have settled for a seat on the board. Legion said in a letter to investors dated October 12, 2018, that it estimated the company’s shares should be worth $ 39 by the end of 2020, up from $ 14.16 on September 30, 2018. However, the action did not exceed this level much. Joining Jana now can certainly be helpful as the business can be much more aggressive than the Legion. This is because, unlike Legion, Go is currently not required to circumvent sanctions. We expect Jan to continue to advocate for a strategic review and are confident that the Company will be receptive to these proposals. Otherwise, from February 3, 2022, Jana can appoint a director to increase the pressure on the company.
Ken Squire is the founder and chairman of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in the 13D activist investment portfolio. .