Vonage: "buy our stock for $17; but value will dilute to $2.78"

Because I happen to have a Vonage account, I have received an email from the company that offers access to a Prospectus dated May 5 that details the offering of Vonage stock as part of what Vonage calls its Customer Directed Share Program.

As one who had opened an account directly with Vonage (as opposed through a third-party wholesaler) prior to December 15, 2005, and who meets other criteria, I qualify.

Because I write about this company, its competitors, and the telecommunications sector as a whole, I would not buy Vonage stock. I am thinking, though, that this offer would be of initial interest to some of you readers.

Working on that assumption, I have read through the entire Prospectus. I think there are a couple of things you might want to know.

It is being reported that Vonage shares will be offered to the public at a projected $17 a share. But it appears Vonage does not believe the Value of these shares will increase in the short term. In fact,the opposite is projected to happen:

"As a new investor, you will experience immediate and substantial dilution," Vonage points out.

Here is why, according to Vonage (bold face is mine).

The price you will pay in this offering for each share of our common stock will exceed the per share value attributed from our tangible assets less our total liabilities. Therefore, if we distributed our tangible assets to our stockholders following this offering, you would receive less value per share of common stock than you paid in this offering. Assuming an initial public offering price of $17.00 per share (the midpoint of the range set forth on the cover page of this prospectus) the net tangible book value adjusted for the net proceeds of this offering at March 31, 2006 was approximately $433.1 million, or approximately $2.78 per share. Pro forma net tangible book value per share represents the amount of our total consolidated tangible assets less our total consolidated liabilities, divided by the total number of shares of common stock outstanding. Accordingly, if you purchase shares of our common stock in this offering you will suffer immediate dilution of $14.22 per share in pro forma net tangible book value. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock and the losses we have incurred.

I should reiterate that I am not offering advice here, but merely point this out as an item in the Prospectus.