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Vonage IPO Hits Market Turbulence

Will fans of Internet calling services put their money where their mouths are and pay $17 to buy 31.2 million shares in the technology?

That's the hope of Voice over IP (VoIP) company Vonage Holdings Corp., which plans to use the majority of proceeds of a $531 million IPO to expand the business while paying off mounting debt.

The Holmdel, N.J., company begins trading on the New York Stock Exchange under the symbol "VG." The IPO, filed in February, was led by Citigroup, Deutsche Bank Securities and UBS Investment Bank.

By mid-morning, Vonage stock dropped to $14.69 from its $17 opening, as more than 22 million shares were traded.

A Vonage spokesperson could not comment on the sell-off or apparent market skepticism, saying the company is under a "quiet period" for the remainder of the week.

The IPO of the VoIP darling would be the second to Google's 2004 IPO, which was worth nearly $2 billion.

Earlier this month Vonage notified its customers they could purchase shares. The company says it has reserved 13.5 percent of the more than 31 million shares of common stock for purchase by customers.

Vonage is faced with balancing growing demand for VoIP and growing debt. Despite subscriber lines jumping to more than 1 million in September from 275,615 for the previous year, it has never reached a profit.

In its IPO, the VoIP company reported facing $310 million in cumulative losses through the end of September 2005. Vonage says much of that debt stemmed from heavy marketing efforts. Marketing consumed $176.3 million for the first nine months in 2005.

The VoIP company's strategy of pursuing growth may mean the company remains in debt, according to the IPO.

"We are pursuing growth, rather than profitability, in the near term to capitalize on the current expansion of the broadband and VoIP markets and enhance the future value of our company," Vonage said in its filing.

"This strategy, however, may not be successful, and we may never achieve profitability."

Former CEO Jeffrey Citron, who stepped down as Vonage CEO in February, will own 41 percent of the Vonage stock, worth $875 million. Mike Snyder replaced Citron as CEO.

Vonage competes with eBay's Skype, which offers a mix of free and premium VoIP services. Skype, which eBay purchased for $2.6 billion in September, boasts 100 million downloads of its VoIP software.

To "turbo charge" its growth, Skype recently announced it would suspend calling charges for users calling out to regular phones in the U.S. or Canada.

But Skype isn't safe from legal trouble. StreamCast this week added eBay to a list of 21 vendors it's suing for patent infringement and other charges.

In the suit, as internetnews.com reported earlier today, StreamCast alleges that Skype's founders, "illegally and secretly transferred away the rights to the FastTrack technology." Skype uses the FastTrack network to help facilitate VoIP calls.