Maryland's economy took another step into its high-tech present yesterday, as the Beltsville-based Internet service provider Digex Inc. completed the initial public stock offering it had called off after the summer breakdown in the market for technology stocks.
The $45 million offering was the latest in a series of initial public offerings that are transforming the face of corporate Maryland. Digex became at least the 16th Maryland company to go public since the beginning of last year, almost all of them related either to new information technology or to deregulation of existing science-based businesses like telephones or health care.
Digex first tried to go public in July, but retreated in the face of market resistance. The new offering was cut back in size to $37.5 million from $55 million and was handled by a small Washington underwriter after original sponsors Salomon Bros. and the San Francisco investment bank Montgomery Securities parted ways with Digex.
But the offering ended up going better than the revised plan called for, as Digex sold 4.5 million shares at $10.125 instead of the expected 3.75 million. The shares rose to $12.75 before settling down to close at $11.81. At that price, the market says the six-year-old company is worth $125.4 million.
"Management did an excellent job to convince our investors," said Jim Kleeblatt, head of the syndicate department at Friedman, Billings, Ramsey & Co., the Washington firm that led the offering. He said it sold mostly to institutional investors in the United States and abroad.
Frank A. Adams, Digex's chairman, denied that the company's rough road to market had anything to do with recent management changes, including a new chief executive and several other senior officers who have arrived since February.
He also denied the delay had anything to do with disclosures in the stock prospectus that the firm's lack of accounting controls prompted a warning from the firm that conducted Digex's 1995 audit.
"Their statement said [Digex] had no orderly accounting department during this period of rapid growth in 1995," said Adams, who is also the president of Grotech Capital Group, the Timonium venture capital firm that owns about 16 percent of Digex after yesterday's offering.
Digex's sales were $1.7 million in the first half of 1995 and $5.2 million in the first half of this year. That's still much smaller than other national Internet service providers were when they went public. The companies provide telecommunications and software to people who use the Internet.
Digex had 263 employees last month, up from 32 at the end of 1994.
The company has never made a profit and lost $7.3 million in the first half of this year.
But Adams said the management problems were fixed before the July attempt to take the company public, and co-founder and former Chief Executive Doug Humphrey had helped plan the executive reorganization that demoted him to chief technical officer.
Adams said the problems were not the reason Digex took the offering away from its more prominent underwriters. He said Salomon and Montgomery were still willing to do the deal but wanted Digex to wait until after they cleared up their backlog of other offerings canceled during the summer.
He conceded Digex got less for its stock than it would have if the company were larger, but said it benefited from the fact that it serves only businesses, which generally will pay more for computer services than casual users. That convinced the institutions Digex is more likely to grow fast and turn profitable sooner than if it targeted the consumer market.
Pub Date: 10/18/96