Business Insight Zone

Internet telephony company Vonage has been in the news lately for all the wrong reasons — most notably, for the withering blow it received when a federal judge ruled that its technology infringes on patents held by rival phone company Verizon. For now, Vonage is able to soldier on because an appeals court stayed that ruling; the company has also launched a big p.r. campaign to attack Verizon’s lawsuit and improve its own image.

Vonage’s image has suffered problems throughout its life as a public company. When it debuted on the New York Stock Exchange in mid-2006, investors gave it a cool reception: Vonage shares fell from $17.00 to $14.79 on the first day of trading, and have continued to slide since. Many factors have contributed, from poorly received television ads to a revolving door in the CEO suite. But underlying it all is a business model that has delivered explosive growth but no profits. While Vonage’s revenue grew from less than $100 million in 2004 to more than $600 million in 2006, losses also mounted during the same period, climbing from $69.9 million in 2004 to $338.6 million in 2006. All this and patent troubles, too? No wonder investors have fled for the exits.

By contrast, consider the wireless service provider MetroPCS, which had its own IPO just last week. Although the company’s offer price for its shares was $23.00, the first bid for them came at $25.10, and by the end of the first day of trading, the price had climbed to $27.40. MetroPCS hasn’t been lavishing its funds on huge ad campaigns, but it has grown quickly and racked up profits. It brought in more than $1 billion in revenues each of the past two years, and turned solid profits in both 2005 and 2006 despite substantial expansion costs.

Market watchers often want to use the performance of individual IPOs as an indicator for the health of an entire sector. Sometimes that’s warranted, and in general the atmosphere around telecom IPOs seems to be better now than it has been for a couple of years. But sometimes an IPO is just an IPO, and reflects the performance of the company making the offering, not the sector as a whole. That seems to be the lesson to take from the strong debut of MetroPCS and the cautionary tale of Vonage, anyway.

The proposed Barclays purchase of ABN Amro has loomed large in the banking world for weeks, and even more so since Barclays came forward with a formal offer north of $90 billion. Any deal of that magnitude — and this one stands to be the largest bank merger ever — would draw plenty of attention for its sheer size, but the Barclays/ABN tie-up may carry even more weight as a harbinger of the wave of European bank consolidation that industry watchers have long figured should be coming.

The logic of consolidation is clear enough: big banks consolidate so that they can squeeze out costs from combined operations. This logic has ruled for years in US banking; witness the mega-acquisitions of Nationsbank (by Bank of America), Wells Fargo (by Norwest, which took the Wells Fargo name), and Bank One (by JPMorgan Chase). Deals like these — and Barclay’s purchase of ABN Amro — are also meant to expand the acquiring banks’ reach into new geographies and new niches of financial services.

While the offer for ABN Amro is of historic size, it is not unprecedented in the history of European financial services. Take, for instance, the creation of Fortis, which assumed its current form through the combination of several Dutch and Belgian banks and insurers. But the structure of Fortis may also provide a clue as to one reason why large mergers have been unusual in European banking: the company has an elaborate corporate structure designed to ensure that its identity is split exactly between Belgium and the Netherlands.*

It’s easy to think of Europe as one big market because of the European Union’s robust economy and the reach of the Euro currency. And indeed, the opening of Europe’s national borders to outside trade since World War II has been one of the profoundest changes in the world’s recent economic history. Still, old issues of national pride do arise, robust European Union or no. This was made exquisitely clear last year when the steel giant Mittal came courting for the hand of Arcelor, and it was made clear again when Barclays and ABN Amro announced their deal, which preserves key Dutch and British aspects of the merging companies, not least by aiming to install the British CEO in the Dutch headquarters.

Setting aside issues of nationalism, there’s so much money at stake in the purchase of ABN Amro that the bank’s other major suitor, a consortium of Banco Santander Central Hispano, Fortis, and The Royal Bank of Scotland, seems intent on stopping the Barclays purchase if it can. However this new union of European banks turns out, the process surely won’t be boring.

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* To document this structure, Hoover’s actually maintains four separate records for the grouping of parent companies that make up Fortis: Fortis N.V., Fortis SA/NV, Fortis Banque SA/NV, and Fortis Insurance N.V.

Four of the world’s oil “majors” — BP, Chevron, ConocoPhillips, and Exxon Mobil — are set to report earnings this week. Although crude oil and gasoline prices have climbed in recent weeks, overall prices were down for the quarter, which could put a dent in the (recently very large) profits of Big Oil.

Complicating news: the past weekend’s presidential elections in Nigeria may not have been carried out fairly. During the past couple of years, Nigeria’s internal strife has interrupted exports from its oil-rich southeastern quadrant. Worst of all was a months-long hiatus in shipments that took half a million barrels of oil per day off of world markets. Given high demand and tight supplies of oil worldwide, further unrest in Nigeria — which is one of the top ten oil producing countries in the world — could drive crude prices back up again.

Tim Walker has covered several industries, especially electronics manufacturing, heavy industry, and international banking, since coming to Hoover’s in 2000. He has also been a commentator in other venues, including BusinessWeek, CNBC’s “Morning Call” program, and local television. Tim has also published more than 100 essays, profiles, and reviews in periodicals including the Austin Chronicle and the Austin American-Statesman.

Tim lives in Austin with his wife and children. He holds a bachelor’s degree in history from the University of Texas, where he was a Dedman Scholar, and a master’s degree in history from the University of St. Andrews in Scotland, where he was a Rotary Scholar. He is now a doctoral student in U.S. history at the University of Texas. An experienced public speaker and teacher, Walker has also led training sessions on workplace productivity for Hoover’s and other organizations. (If you’d like to book him as a speaker, check out his speaking page.)

Keep up with Tim via Twitter, Facebook, or LinkedIn, or e-mail him at twalker {at-sign} hoovers {period} com.