The IPO spotlight will shine on two high-profile deals in the coming week. One is a blockbuster expected to raise over $2 billion. The other is surrounded with controversy. The big deal is MasterCard. The other one is Vonage Holdings.

MasterCard, the Purchase, New York-based credit card and debit card provider, is planning to price 61.5 million shares at $40 to $43 each to raise $2.55 billion, making it one of the largest U.S. IPOs ever.

Vonage Holdings, of Holmdel, New Jersey, supplies VIP services to about 1.6 million subscribers. The appeal of VoIP is simple: it costs less than landline phone service. Vonage plans to price 31.3 million shares at $16 to $18 a share to raise $531 million (see Vonage Thinks Its Worth $2.8B).

With VoIP service, talk may be cheap. But critics of Vonage say the quality of its VoIP service is sub-par.

Savvy IPO investors, though, are much more concerned about the red ink on Vonage’s balance sheet and its founder’s brush with the SEC.

Behind the Circus Hype

The Vonage Holdings IPO comes to town with all the fanfare of a three-ring circus. Here are a few of the attractions:

·          The VoiP industry is booming. In its due diligence meeting, Vonage sourced Gartner in projecting VoiP growth will expand to 27 million users by 2009 from 1 million users in 2004.

·          Vonage’s revenue is soaring. For the three months ending March 31, Vonage reported revenue of $118.8 million, up 191.9 percent from revenues of $40.7 million for the same three-month period a year ago.

·          The company requested underwriters to set aside up to 13.5 percent of the offering to be allocated to certain of its customers.

Now that will catch some attention. However, in reading the prospectus, there were a few items that popped out of the fine print. They were:

·          Vonage is running huge losses, although they have narrowed. For the March quarter, Vonage reported a net loss of $40.7 million, less than a net loss of $60 million for the same three-month period a year earlier.

·          Vonage had an accumulated deficit of $467.4 million since being formed in 2000.

·          Vonage has heavy competition from Skype (a free service), AOL, and others.

·          Jeffery A. Citron, Vonage’s chairman, owns and controls about 53.7 million shares, or about 41 percent of the company. He has an interesting background, according to the prospectus. On page 118, it reveals Mr. Citron became the chairman and CEO of Datek Online Holdings in February 1998, and out of that relationship entered into a settlement with the Securities and Exchange Commission agreeing to excessive fines (reportedly $22.5 million), a ban from future association with securities brokers or dealers, and enjoinments against future violations of certain U.S. securities laws.

Cutting in your customers on your “hot” IPO is nothing wrong and nothing new. The Boston Beer IPO was an example. On November 20, 1995, Boston Beer priced 2.99 million shares at $20 each. That was above its filing range of $10 to $15 per share. The company set aside about 25 percent of the offering for people who drank its beer, Samuel Adams Boston Lager. Coupons were placed in six-packs so its “customers” could subscribe for stock in the IPO. The offering was oversubscribed, priced above its original filing range, sold at an opening-day high of $32.13 per share, and closed on November 24 at $32.50 per share—four days after it went public.

But when the circus left town, reality set in for the Boston Beer IPO. It never saw that price again. Instead, it sold to a low of $6.50 per share on October 8, 1998. Since then, it recovered to close at $26.72 per share on Thursday.

The Billion-Plus Club

If MasterCard’s IPO goes as planned, it will join the $1 billion-plus club of new issues. And it might even get a new story line for its “Priceless” campaign of TV commercials. All told, there have been 35 U.S. companies that have raised $1 billion or more in the IPO market, according to available reports.

The largest U.S. IPO was the April 2000 offering of AT&T Wireless. The company priced 360 million shares at $29.50 each to raise $10.6 billion. It closed its opening day at $31.63 per share, up 7.2 percent from its initial offering price. On October 26, 2004, Cingular Wireless acquired AT&T Wireless for $41 billion in cash, or about $15 per share. That was 49.2 percent below its initial offering price.

The last blockbuster was the February 2005 offering of Huntsman, a Salt Lake City-based maker of chemical products. The company priced 60.2 million shares at $23 each to raise $1.38 billion. On Thursday, it closed at $18.49 per share, down 19.6 percent from its initial offering price.

Inside the IPO Calendar

There are five new faces at this week’s IPO window plus the usual carryovers from past weeks.

Among the current offerings are a biotech company (Luna Innovations), a water equipment control manufacturer (Mueller Water Products), a fitness centers operator (Town Sports International Holdings), MasterCard, and Vonage.

Again, there are two carryovers from previous weeks. They are a pharmaceutical company (QuatRx Pharmaceuticals) and a “blank check” company (HD Partners Acquisition).

The seven deals are expected to raise about $3.87 billion.

Luna Innovations is a Roanoke, Virginia-based company developing innovative technologies for molecular technology solutions and sensing solutions. Luna plans to price 4 million shares at $11 to $13 each. The IPO is to start trading on Thursday. As of March 31, Luna Innovations reported an accumulated deficit of $2.2 million.

Formed in 1998, Luna Innovations has about 161 employees. Underwriters: ThinkEquity Partners is the lead manager. Acting as co-managers are WR Hambrecht and Merriman Curhan Ford. Selected Principal Shareholder: Carilion Health System. 52-Week Percentage Change: Dow Jones U.S. Biotechnology, up 13.8 percent; Nasdaq Composite Index, up 6.74 percent.

MasterCard is a Purchase, New York-based global payment solutions provider of various services in support of credit, debit, and related payment programs of nearly 25,000 financial institutions.

It plans to price 61.5 million shares of Class A common stock at $40 to $43 each. The IPO is to start trading on Thursday. For the year ending December 31, MasterCard reported net income of $266.7 million on total revenues of $2.94 billion, compared with net income of $238.1 million on total revenues of $2.59 billion for the same period a year ago. For the three months ending March 31, MasterCard reported net income of $126.7 million on total revenue of $783.5 million, compared with net income of $93.3 million on total revenue of $658.2 million for the same period a year ago.

Formed in 1966, MasterCard has about 4,400 employees. Underwriters: Goldman Sachs, Citigroup, HSBC and JP Morgan are the joint-lead managers. Acting as co-managers are Bear Stearns, Cowen, Deutsche Bank Securities, Harris Nesbitt, KeyBanc Capital Markets and Santander Investment.

Selected Principal Shareholders: JPMorgan Chase, Citigroup, Bank of America, and HSBC Holdings.

52-Week Percentage Change: Dow Jones U.S. Business Support Services Index, up 23.9 percent;

Nasdaq Composite Index, up 6.74 percent.

Mueller Water Products is a Tampa, Florida-based manufacturer of water infrastructure and flow control products. The company’s products are used in water distribution networks, water and wastewater treatment facilities, gas distribution systems, and fire protection piping systems.

Mueller Water Products plans to price 23.5 million shares of Class A common stock at $16 to $18 each. The IPO is to start trading on Friday.

Mueller Water Products has about 7,000 employees. Underwriters: Banc of America, Morgan Stanley, and Lehman Brothers are the joint-lead managers. Acting as co-managers are SunTrust Robinson Humphrey, Goldman Sachs, Avondale Partners, and Calyon Securities (USA) Inc. Selected Principal Shareholder: Walter Industries. 52-Week Percentage Change: Dow Jones U.S. Diversified Industries Index, down 0.65 percent; Nasdaq Composite Index, up 6.74 percent.

Town Sports International Holdings is a New York City-based owner and operator of 143 fitness clubs in the Northeast and Mid-Atlantic regions of the United States and three in Switzerland. The company operates 97 New York Sports Clubs within a 75-mile radius of New York City, 20 Boston Sports Clubs in the Boston region, 19 Washington Sports Clubs in the District of Columbia, and six Philadelphia Sports Clubs in Philadelphia. Town Sports International Holdings plans to price 10 million shares at $16 to $18 each. The company will offer 7.6 million shares and selling shareholders will offer 2.4 million shares.The IPO is to start trading on Thursday.

As of March 31, Town Sports International Holdings reported an accumulated deficit of $2.1 million. Formed in 1973, Town Sports International Holdings has about 8,460 employees. Underwriters: Credit Suisse and Deutsche Bank are the joint-lead managers. Acting as co-managers are William Blair, Piper Jaffray, and RBC Capital Markets. Selected Principal Shareholders: Bruckmann, Rosser, Sherrill; The Farallon Entities; and The Canterbury Entities. 52-Week Percentage Change: Dow Jones U.S. Recreational Products Index, down 1.55 percent; Nasdaq Composite Index, up 6.74 percent.

Vonage Holdings is a Holmdel, New Jersey-based provider of Voice over Internet Protocol, or VoIP, services to about 1.6 million subscribers as of April 1, 2006, according to the prospectus. Over 95 percent of the company’s subscribers are in the United States. Vonage Holdings plans to price 31.3 million shares at $16 to $18 each. The IPO is to start trading on Wednesday, May 24.

As of March 31, 2006, Vonage reported an accumulated deficit of $467.4 million. Formed in May 2000, Vonage has about 1,416 employees. Underwriters: Citigroup, Deutsche Bank, and UBS Investment Bank are the joint-lead managers. Acting as co-managers are Bear Stearns, Piper Jaffray, and Thomas Weisel Partners. Selected Principal Shareholders: Jeffrey A. Citron, Bain Capital, Meritech Capital Partners, and New Enterprise Associates 52-Week Percentage Change: Dow Jones U.S. Fixed Line Telecommunications Index, up 7.52 percent; Nasdaq Composite Index, up 6.74 percent.

HD Partners Acquisition, a Santa Monica, California-based “blank check” company, plans to offer 12.5 million units at $8 each. Each unit consists of one common share and one warrant. The IPO is to start trading during the week of May 22. Underwriters: Morgan Joseph is the lead manager. Acting as co-managers are Southwest Securities, GunnAllen Financial, and Legend Merchant Group.

QuatRx Pharmaceuticals is an Ann Arbor, Michigan-based pharmaceutical company developing compounds in the endocrine, metabolic, and cardiovascular therapeutic areas. The company has four product candidates in clinical development. One compound is expected to enter clinical development sometime in the first half of 2006. QuatRx Pharmaceuticals plans to price 6 million shares at $11 to $13 each. The IPO is listed on the calendar as “day to day.”

From its inception in November 2000 to December 31, 2005, QuatRx Pharmaceuticals has not generated any revenue. It had an accumulated deficit of about $79.5 million. QuatRx Pharmaceuticals has about 57 employees. Underwriters: Banc of America and Cowen are the joint-lead managers. Acting as co-managers are Lazard Capital and Pacific Growth Equities. Selected Principal Shareholders: MPM Bioventures, TL Ventures, InterWest Partners, Frazier Healthcare, Thomas Weisel Healthcare Venture Partners, and Biomedical Venture. 52-Week Percentage Change: Dow Jones U.S. Pharmaceuticals Index, down 7.09 percent; Nasdaq Composite Index, up 6.74 percent.