NEW YORK - After months of shunning the initial public offerings of tech companies, investors have begun warming to them again, yet another sign the IPO market might be recovering.
So far in 2009, three of the four U.S. IPOs have had a tech flavor and another, by satellite image provider DigitalGlobe Inc, is set to price next week.
Two more tech companies, network software provider SolarWinds Inc, and online restaurant reservation service Open Table Inc, recently filed terms for their IPOs, suggesting they may soon get into the open-market ring, too.
Bankers and analysts say the reemergence of tech deals typically comes early in the IPO recovery cycle because they have sought-after qualities: growth, low debt load and profits.
Technology stocks are seen as being the leaders of the equity markets in coming out of a downturn -- there is generally a belief that technology stocks are among the first out of the box to outperform, said Alex Lehmann, a managing director for equity capital markets with Jefferies & Co.
The 2009 surge in IPO interest stands in sharp contrast with 2008, when tech IPO activity fell 89 percent from 2007 on a dollar basis, according to Thomson Reuters data.
The tech IPOs so far this year -- Chinese video game maker Changyou.com Ltd, online college operator Bridgepoint Education Inc and language software maker Rosetta Stone Inc -- are generally profitable, low debt outfits.
Before this flurry, there had not been a tech IPO since Rackspace Hosting Inc last August, with DigitalGlobe set to be the first venture-backed tech IPO since then.
ALL GROWN UP
Another difference of this batch of tech companies and the aspirants in the pipeline from those of a decade ago -- when there were hundreds of deals a year -- is they are more seasoned.
We don't have fly-by-the-seat-of-your pants and throw- jello-on-the-wall-to-see-what sticks tech IPOs anymore, said Maria Pinelli, Americas director for strategic growth markets at Ernst & Young LLP in New York.
She says the proof is that the average size of a tech IPO in the pipeline -- at $284 million -- is higher than the overall average for all sectors, according to an Ernst & Young report this week.
There are 18 tech IPOs in the pipeline, the largest sector in the works, according to Thomson Reuters data.
While tech deals on the calendar are larger, investors so far this year have accepted smaller deals as a concession to the awakening IPO market.
You have a bit of a compromise in terms of valuation expectations from both the buy-side and the issuers, Lehmann said.
A case in point is SolarWinds, which filed for a $250 million IPO in March 2008, but now expects to raise about $127 million.
Even though it might be benefiting from tech's overall surge in sales of 82 percent in 2008, DigitalGlobe's IPO may face headwinds because the majority of its proceeds will go to existing shareholders, including Morgan Stanley, which owns about 37 percent of the company.
We believe insider selling will dampen some of the investor enthusiasm, said David Menlow, president of analysis firm IPOFinancial.com.
DigitalGlobe is set to launch a third satellite this fall, making comparisons with its most direct public competitor, GeoEye Inc, difficult given the uncertainty around a launch, according to Matt Therian, an analyst with Connecticut- based research firm Renaissance Capital.
But DigitalGlobe, with fourth-quarter 2008 sales about 50 percent greater than GeoEye, could still command a higher multiple given it is less dependent on aerial image taking, whose costs are more variable, Therian said.
Regardless of how DigitalGlobe performs, tech IPOs are set to be well represented for a while.
Because they've had to wait a bit longer for the IPO window to reopen, they are more seasoned -- and that's why you are seeing deals getting done, Lehmann added.
(Reporting by Phil Wahba; editing by Patrick Fitzgibbons and Andre Grenon)