Right or wrong, the market is never shy about giving its opinion. If it likes earnings results, or a move made by a company, it will reward you. If you disappoint it, or you inject uncertainty, the market will react swiftly and sometimes violently. This certainly keeps things exciting, if not maddening at times for investors.
Yesterday, Vonage (VG) found that out the hard way. The VOIP name fell 16% to a 16-month low after announcing some decent earnings. While revenue was just slightly ahead of consensus estimates, earnings per share came in at $0.10, well ahead of the $0.06 cent consensus. It should have been a big day for Vonage, a positive day. However, there was another announcement made by the company, which was the likely culprit behind yesterday's 1/6 decline in the company's market cap.
Vonage announced the purchase of privately held CPaaS (Communication Platform as a Service) company Nexmo, the second largest in that field in terms of revenue. Vonage will pay $230 million in cash and stock for the San Francisco based company.
This is a sizable transaction for Vonage, as it attempts to further its efforts into the cloud communications market for businesses. The company will pay $195 million at the close of the transaction, a minimum of $159 million in cash, and maximum of $36 million in stock. Much or of the cash portion will be financed through debt, as the company ended the quarter with about $36 million in cash. Another $35 million of the purchase price will be paid to Nexmo management and employees in restricted stock and cash. In addition, there's $20 million in the deal for Nexmo, if the company achieves performance targets.
While Vonage has not been shy about making acquisitions, this one may have blindsided investors. Since Nexmo is a private company, part of the negative reaction to the transaction may be that there are many unknowns. We know the purchase price of the deal, but we really don't know what Vonage is getting in return. We have not seen financials for Nexmo, which would be readily available at this point if it was a publicly traded company.
This could be a fantastic deal for Vonage. That's what management tells us. But all investors really know is that the company will be incurring additional debt, and there will also be some dilution on the equity side. We don't know if Vonage paid two times revenue, or 15x EBITDA for Nexmo.
We don't know what we don't know, and the uncertainty has sent investors to the exits. It would have been interesting to see how the stock would have reacted yesterday to the earnings announcement alone.
Never a dull moment, but I am not ready to throw in the towel on this one. For its part, though, Vonage needs to get in front of this and remove some of the uncertainties.