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Vonage's Post IPO Nightmare

All that's missing is the familiar Vonage jingle from its television commercials playing in the background as the Voice over IP provider scrambles to recover from an IPO marketing nightmare. (Woo ooh. Woo ooh ooh.)

Barely a week after Vonage's stinker of an initial public offering, are customers of the VoIP player thinking of dumping Vonage's service along with the shares they were offered?

That's one risk the VoIP player faces as it scrambles to placate customers. But it gets worse.

Some customers ran into glitches on how they were notified about the offer to get in on the IPO. And apparently others were not aware that they had, in fact, bought shares that were sliding in value soon after the offering.

"Every day seems to bring yet another tale of ineptitude from Vonage's horrifically performing and poorly executed IPO," went one typical complaint on a message board about the stock offering and the glitches.

The Holmdel, N.J.-based Vonage floated into the public markets on May 24, priced at $17, and looking to raise about $494 million.

Soon after its debut, the price slipped to $14.69 and has since dipped to as low as $11.52. (Shares had risen to about $12 during midday trading.)

As part of its offering, Vonage included what's called a "Directed Share" program where it set aside as much as 13.5 percent of its common stock for customers to get in on the ground floor.

That opened the deal up to between 9,000 and 12,000 of its roughly 1 million customers.

Some customers complained that they were confused by the way they were notified, as well as by links that didn't work about where the prospectus information could be found.

Vonage addressed the issues in an amended regulatory filing with the Securities and Exchange Commission. The filing also said voicemail instructions to customers on how to register were incomplete.

"The omission of the name and address of a contact person might be viewed as noncompliance with [SEC rules]," the filing said.

But it also said it would not be able to let customers out of buying the shares, or even buy some back. This kept it on safe legal ground with the SEC, and out of the cross-hairs of class-action lawyers prepared to charge that it treated one class of shareholders better than others.

But it didn't do much to make those customers happy.

In a nod to how risky the move was to offer a piece of the action to customers in the first place, the filing also said it agreed to indemnify its underwriter in case the Directed-Shares program failed.

That's why offers like these are administrative headaches that growing companies like Vonage just don't need, noted Tom Taulli, a finance professor at University of Southern California and the author of "Investing in IPOs."

"When a stock goes down 30 percent after you buy it, you may lose customers, and a negative customer can have a bigger impact than a positive customer can these days, especially with the Internet and blogs," he said. "This is an Internet-based company, so when these things erupt, the impact can be magnified."

Aside from the SEC rule glitches, Vonage is now in an adversarial position with some of its customers that got pulled into the IPO.

With a churn rate already up to 2.1 percent this year, compared to 1.7 percent last year (according to its prospectus), and under attack by cheaper rates by rivals such as Skype and Verizon at a time when it has yet to reach profitability (according to its filings), this is one more headache Vonage just doesn't need.

"You want to make sure it's done right and that you can control the situation. Unfortunately, Vonage has gotten none of that. It's all been negative. That's not good for a company that really needs that kind of branding and marketing."

Plus, it's got competitors breathing down its neck, most notably Skype, which is owned by eBay.

The same day Vonage went public, Skype announced it would hold off on calling charges for users in the U.S. or Canada for the rest of the year.

Just this week the VoIP provider announced a deal in which it will be loaded on Dell laptops.

When you're already operating at a loss, who needs more administrative hassles and potential lawsuits?

"I just think it was a wildcard," Taulli said of Vonage's customer shares offer.

"Retail investors are not as experienced with IPOs. When they see it tanking, they may start to jump and get out. That may have added fuel to the fire.

Institutional investors tend to stick to a stock, especially if they have a large position. Plus, it looks like it wasn't priced right in the first place."

In some cases, he added, he wouldn't be surprised if some customers bought stock and then tried to talk to customer service, which perhaps didn't know what they were talking about.

"Once upon a time, you would sue if you didn't get shares [in an IPO]," Taulli added. "Now, it looks like folks could sue when they did."

A Vonage spokesman did not respond to requests for comment. But Vonage did announce today that it appointed Bryan DiGiorgio as senior vice president of its customer care operations.