Digex puts stock-offering plans on hold Beltsville company cites turbulence in technology shares

Post-Labor Day is target

Firm had hoped to raise $55 million by going public

August 16, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

Digex Inc. of Beltsville has quietly shelved its plans for an initial public offering, saying that the turbulent market for technology stocks has convinced management of the Internet service provider to wait until at least September.

The company had first disclosed its plans to go public on June 17, saying it hoped to raise $55 million by offering about 30 percent of the shares to the public. The money would be used to build up the company's communications network, with the remainder of the stock staying in the hands of company executives and venture capitalists.

"What we wanted to do was make sure we had it wrapped up by July, because August is a terrible month for IPOs," Digex Chief Executive Christopher R. McCleary said.

He said the company's prospectus was not approved by the U.S. Securities and Exchange Commission until July 23. Then, he said, Digex "decided to hold it [the IPO] until after Labor Day" to avoid conflicts with the vacation plans of money managers to whom Digex wants to pitch the shares.

Digex is the second Maryland high-tech firm to put off a stock offering this month. On Aug. 6, American Communications Services Inc. of Annapolis Junction indefinitely postponed an offering of 7 million shares, citing market conditions.

And the tough market hindered yet another Maryland company, Ace*Comm Corp. of Gaithersburg, which went public Wednesday. Ace*Comm's 2.5 million-share offering drew a price of $7 a share, well below the $9 to $11 range the company had said it hoped the stock would command.

The whole technology sector has been whipsawing since early summer. The Nasdaq composite index, which contains mostly technology stocks, fell from a high of nearly 1,250 points June 5 to 1,053 in mid-July, before rebounding. It ended yesterday at 1,134.69.

Internet service providers like Digex have been hit hard as well. Netcom On-Line Communications Inc. fell from $44 in May to $16.25 by July 29, and PSINet Inc. fell from $18.50 in May to $8.375 in July.

But McCleary insisted that Digex is not delaying the offering because of any concern about its ability to get the price it wants for its shares. He blamed other firms' slides on specific management issues.

"We believe our story is much different than consumer-oriented [Internet providers] or the basket of search-engine [Internet search software] stocks that hasn't fared very well," he said. "We are strictly business-to-business."

But the stories are similar, because Digex, like the others, is still an early-stage company that is losing money. The company went through a significant management shake-up this year, as company founders were replaced at the top by professional managers. It also adopted its strategy of serving only business customers last year, at the behest of venture capitalists who funded Digex's capital needs, according to the company's draft prospectus.

The payoff: Digex had expanded to 750 customers in its core businesses by May 31, from 65 customers 13 months earlier.

McCleary said another major contract will be ratified Monday, when Orion Network Systems Inc. of Rockville will formally announce a $10 million multi-year deal to buy Digex's Internet access services for resale under Orion's private label.

Digex has two similar deals with other telecommunications companies that want to expand into the Internet service business without building their own networks.

Pub Date: 8/16/96

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