Digex seeks IPO approval Up to $55 million sought by surging Internet provider

June 18, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

One of Maryland's hottest high-tech firms upshifted onto the financial superhighway yesterday, as Internet access provider Digex Inc. said it is seeking federal approval for an initial public stock offering to raise up to $55 million.

The Beltsville-based company ranked second on the Greater Baltimore Committee's "Fast 40" list of high-growth Maryland technology firms last fall, but remains tiny compared to its competitors in the hotly competitive business of connecting clients' computers to the Internet.

With $5.1 million in sales last year and a loss of nearly $4 million -- most of it related to the cost of building the company's network -- Digex, formerly known as Digital Express Corp., remains much smaller than players such as Uunet Technologies Inc., PSINet Inc., and BBN Corp.

Uunet and PSINet lost money last year as well.

Of course, all of them are far smaller than major corporations such as AT&T Corp. and MCI Communications Corp. that have indicated they too will get into the Internet access business.

But experts said Digex will be attractive to Wall Street despite its size.

They point to the company's focus on serving business customers, who demand more of the customized services access providers sell in order to harness the raw communications power of the 'Net, and the fact that the biggest, richest competitors like AT&T are focusing on high-volume, less profitable consumer markets.

"It's definitely smaller than Uunet, and there will be a discount because of size," said Kevin Moore, a London-based analyst for Alex. Brown Inc. "But the market is very receptive to business-focused Internet service providers."

Moore said a purely business-oriented access provider like Uunet can command a stock valuation of as much as 10 times its annual revenue, while a consumer-oriented access provider could command as little as double or 2.5 times its annual revenues.

SEC regulations prevented the company from commenting while it is in the process of holding an IPO.

Digex already has a customer list that includes Merrill Lynch, the National Basketball Association and the U.S. Securities and Exchange Commission. It is riding a growth wave that has boosted the number of corporate Internet sites to 171,738 in June from 4,912 last August, according to Digex' draft prospectus filed with the SEC.

Peter Barris, a general partner at the Baltimore venture capital firm New Enterprise Associates, said the difference between Digex and Uunet is a matter of size and geographic reach.

"They're viewed as a more regional player," said Mr. Barris, whose firm controls 10.1 percent of Vienna, Va.-based Uunet. "This is a scale game. That's why Uunet is in the process of selling itself to MFS [Communications Co.]."

Barris agreed with Moore that Digex' focus on serving business computer users is likely to make the shares more expensive than they would be if Digex were after consumer markets.

The preliminary prospectus that Digex filed with the U.S. Securities and Exchange Commission doesn't contain enough information to calculate the valuation the company expects from the market.

It does not include final figures on how many shares the company will offer or the price underwriters -- led by Salomon Inc. and Montgomery Securities -- expect the shares to command.

A source close to Digex, however, said the firm is committed to raising $55 million from the offering.

It expects to use the money to finance expansion of its network infrastructure and to acquire other regional service providers as an alternative strategy to expand its regional coverage.

None of the proceeds will be used to cash out the venture capitalists and other investors who funded Digex' early development. The biggest shareholder is the Timonium venture capital firm Grotech Capital Group, which owns 27.7 percent of Digex' stock. Founder Doug Humphrey owns almost 16 percent.

The final price and size of the offering will be determined after the company calculates its second-quarter financial results.

Pub Date: 6/18/96

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