Jeffrey Citron pulls a Michael Dell

The Vonage founder's return to the CEO chair means the company is less likely to settle with Verizon or look for a buyer, says Fortune's Stephanie Mehta.

By Stephanie Mehta, Fortune senior writer

NEW YORK (Fortune) -- He's back.

Jeffrey A. Citron, the pugnacious founder, chairman and largest individual shareholder of troubled telco Vonage (Charts), is back in the CEO chair, temporarily at least, following the sudden resignation of Michael Snyder. So put aside any notions that this company might seek to settle its brewing patent dispute with Verizon (Charts). Or that the company is for sale.

Vonage CEO Jeffrey A. Citron

Citron, who owns about 30 percent of the company, is much more likely to keep fighting Verizon, despite suggestions by some that the company pay its fine and move on. (A jury recently found Vonage had violated some of the bigger phone company's patents, a decision Vonage currently is appealing.) And he's probably not interested in selling the company, valued at $515 million today, compared with about $2 billion less than a year ago.

No, Citron, 36, is a true believer in Vonage, a company he founded seven years ago despite zero telecommunications experience. Indeed, he hasn't sold a single share of Vonage stock, despite the precipitous slide in value. And he's managed to convince his board of directors to hold onto their shares - and in some cases, increase their holdings in the company.

Indeed, it may have been Citron's unwavering faith in Vonage that led to Snyder's resignation. "I gather Michael Snyder was headed in a different direction," says Daniel Berninger, an analyst with Tier1 Research, and one of the few Vonage bulls out there. "The direction most people would head would be to settle, do a deal, sell the company or concede in some sense. Settling is not in Citron's vocabulary."

But Snyder's challenges as CEO may have begun long before Vonage ran into its latest set of legal issues. Snyder, a former Tyco executive who had run the company's ADT Security subsidiary, was brought in as CEO of Vonage in February 2006, in advance of its initial public offering. According to people familiar with the situation, Vonage needed a CEO with an untarnished reputation to assuage investor concerns about a settlement Citron entered into with the Securities and Exchange Commission in 2003. (Citron paid the SEC a $22.5 million fine to settle charges of unlawful trading; as part of the settlement he neither admits nor denies the SEC's allegations.)

But to some, Synder appeared to be a CEO in title only, with Citron, who remained chairman and chief strategist, remaining very much the face and leader of the company.

A Vonage spokeswoman declined to comment on Mr. Synder's reasons for leaving the company except to characterize the parting as "amicable." She stressed that Mr. Citron's is serving only as interim CEO, and that the board is engaged in an immediate search to replace Snyder.

Citron's decision to return to the driver's seat at Vonage, albeit temporarily, is reminiscent of a similar move by Michael Dell, another young entrepreneur who stepped down as CEO of the company he founded, only to resume the job when his company faced tough times. Dell became CEO of his eponymous computer company in January of this year.

Of course, Vonage is a much smaller company than Dell (Charts), and its problems may be much bigger. In addition to the legal dispute with Verizon, the company continues to lose money, partly because it spends so much to market its service to customers. Vonage says it is reducing its marketing costs - on a conference call detailing first quarter financial results, the company said it would spend about $415 million on marketing this year, about $110 million less than it originally planned to spend. But the company also faces big customer disconnects.

"Consumers have certain expectations of what they want from home phone service," says Sally Cohen, an analyst with Forrester Research. "It's possible they weren't getting what they wanted from Vonage." Vonage uses Internet Protocol, the language of the Internet, to deliver phone calls over customers' DSL or cable modem services.

The combination of high costs, churn and now legal problems makes Vonage one tough turnaround. So tough, in fact, the board may have a hard time finding anyone who wants to replace Snyder -- anyone besides Citron, that is.


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