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Company: Vonage Holdings Corp. (VG)
Business: Vonage is a collection of three main businesses: (i) the legacy consumer VOIP business; (ii) Application Programing Interface (API) business, which helps companies communicate to their customers through text messaging and (iii) Cloud-based Enterprise Communication as a Service business (CaaS).
Stock Market Value: $3.6B ($14.48 per share)
Activist: Jana Partners
Percentage Ownership: 3.91%
Average Cost: n/a
Activist Commentary: Jana Partners is a very experienced activist investor with much success in the Information Technology industry. Jana’s average 13D returns in this industry average 36% versus 10.72% for the S&P 500 over the same period.
On Aug. 31, 2021, it was reported that Jana Partners is pushing Vonage Holdings Corp. (VG) to explore strategic alternatives, including a sale of all or part of the company.
Behind the Scenes:
Jana initially disclosed its position in Vonage in its 13F last quarter and disclosed in its most recent 13F that its position increased 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 company.
The legacy Vonage business is a low multiple, slowly declining business that constitutes the smallest part of the value of the firm (with $284 million of revenue), but it’s what the company is known for. This significantly and adversely affects the company’s overall valuation by dragging down the valuation of its most attractive assets. The API business has approximately $550 million of revenue and is substantially undervalued by the market as part of this company. The closest pure play business to this is Twilio Inc. (TWLO), which trades at 19x revenue. Applying just a 7x multiple to Vonage’s API business would give that business alone a valuation of $3.85 billion, which is equal to the enterprise value of the entire company. If that multiple got anywhere close to TWLO’s 19x multiple, the present valuation of Vonage begins to look real silly. Moreover, the CaaS business has real value as well with approximately $500 million of revenue. Its peers RingCentral and 8×8 trade at 12x revenue and 4x revenue, respectively. Granted that Vonage’s CaaS business would probably trade closer to the 4x multiple, but that gives it another $2 billion of value on a company that presently has a total enterprise value of $3.85 billion. While the legacy Vonage business is the least valuable of the three, management has projected that it will generate $600 million of cash flow over the next five years, and recently announced the termination of a sales process for that unit, which announcement sent the company’s stock price down by 12%. Finally, the company also has approximately $760 million in net operating losses it can use to shield income over the future.
Realizing the true value of these assets is not an operational challenge, but a strategic one. Operations and management are not problems here — the company recently turned over its management team and has had six quarters of good earnings in a row. The discount here is because of market perception and portfolio structure. Accordingly, the way to maximize value here is for the company to engage an investment bank to conduct a thorough strategic review to unlock shareholder value.
There are certainly many good reasons why these businesses should be separated in some manner. A sale of the legacy Vonage business would not only generate cash for the company, but would likely lead to a re-rating of the multiple for the rest of the business that would create shareholder value as well as make the remaining company a highly attractive acquisition target. Moreover, a standalone API business would not only have a much higher multiple, but it would lower the company’s cost of capital closer to its peers to enable it to better compete for M&A opportunities. Alternatively, a strategic review could lead to a sale of the entire company at a premium to private equity, who could do the strategic work themselves to create additional value.
This is not the first recent activist campaign at Vonage. Legion Partners is also involved here and they settled for a board seat. Legion said in an investor letter dated Oct. 12, 2018 that they believe the company’s shares should be worth $39 by the end of 2020 versus $14.16 at Sept. 30, 2018. However, the stock has not moved much above this level. Having Jana involved now could certainly be helpful as the firm can be much more aggressive than Legion. That’s because unlike Legion, Jana is not currently bound to standstill restrictions. We expect Jana to continue to advocate for a strategic review and believe the company will be receptive to these overtures. If not, starting on Feb. 3, 2022, Jana can make director nominations to increase the pressure they exert on the company.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.