Tech IPOs Are Back — But Only for Those That Don't Need Cash

[qi:114] While the recession had many predicting the IPO market would be largely non-existent in 2009, several new tech stocks listed on public markets during April and now in May. The companies squeaking out of the IPO queue, however, are mature, profitable and cash-rich. Their proceeds are going to insiders, not corporate coffers.

It’s one of those cruel paradoxes common to the market these days: The companies raising capital through IPOs are the ones that don’t really need it.

The latest to debut is DigitalGlobe (s dgi), whose satellites troll the planet to deliver imagery used in Google Maps and Microsoft Virtual Earth. Although much of its revenue comes from governments and oil companies, it’s increasingly looking to new applications such as GPS-based mobile devices and video games. The company had revenue of $275 million and a net profit of $54 million last year.

DigitalGlobe filed for an IPO back in April 2008, sitting patiently in the queue until the volatile market grew calmer, which it finally did this spring. And so far, its patience has paid off: The stock priced at $19 a share Wednesday, above its initial range of $16-$18 a share, to raise $279 million. But nearly all of it went to hedge funds and other institutional investors. Shares of DigitalGlobe ended the week at $20.50, 13 percent higher than its offering price.

The DigitalGlobe launch comes a month after three other successful IPOs: (s cyou), a China-based operator of online role-playing games; Bridgepoint Education (s bpi), an online education company; and Rosetta Stone (s rst), a maker of language-learning software. Shares of Changyou are 84 percent above their offering price, while Bridgepoint and Rosetta Stone shares are down 1 percent and up 23 percent, respectively.

Like DigitalGlobe, these companies have shown profitability and operate in markets where consumer demand has remained relatively strong during the economic downturn. Except for Changyou, all of them filed for IPOs last year. And all had healthy operating cash flows last year and adequate cash on hand. In other words, they were not desperate for capital.

So why would they list in an uncertain market? To pay out insiders. According to Renaissance Capital, the four recent tech IPOs gave between 50 percent and 91 percent of their proceeds from the offerings to insider investors. A report from the firm on Friday noted the IPOs are motivated by a desire for liquidity by parent companies and venture backers.

VC and private equity backers are taking the opportunity to gain liquidity, even if it means foregoing the aftermarket returns that are typical during a slow issuance IPO market. The companies that have been able to go public this year are by necessity more mature than a typical IPO, and  as a result their investors have been sitting on their stakes for several years (most of the shares being sold by insiders were originally purchased in 2005 or earlier), which makes it understandable that they would take the opportunity to monetize a piece of their holdings.

This week brings two more planned offerings: SolarWinds (s swi), a maker of enterprise software, and OpenTable (s open), an online restaurant-reservation service. SolarWinds’ is an excepton to the insider trend: Only 26 percent of its proceeds is going to insiders, according to Renaissance. Much of the rest will be used to pay down debt.

OpenTable, which is giving 48 percent of its proceeds to insiders, will test investor confidence: It posted a loss of 10 cents a share in 2008, although it swung to a profit of 2 cents a share in the first three months of 2009. Its fate will make clearer whether the market have the stomach for a company that doesn’t have a steady history of profits.

As encouraging as it is to see tech companies breathe new life into an IPO market that has all but shut down since last summer, it’s still too early to expect a sustained comeback. While a sense that the market has bottomed has made investors who stockpiled cash during last fall’s market collapse feel brave enough to welcome select new offerings, many still believe we’re in a bear market rally, and any weakness in the stock market in general will slam the IPO gates shut before companies that have a bigger need of new capital can raise it.