Yandex IPO marks full internationalization of Russia’s search engine market

It is no wonder that the company owners, investors and analysts have touted the IPO as an event that finally put Russia on the international Internet-engine-services map. “Russia is famous for its vast natural resources and lots of scientific and technologic talents. So far, there are very few Russian technology companies that operate globally. We believe that the scientific culture of Russia is so strong that sooner or later such a company will appear. Today, such company is born,” said Arkday Volozh, Yandex’s co-founding owner and CEO.

A new brand of Russian corporations

The emphasis on a new brand of Russian business is evident all over Yandex — from the rather relaxed atmosphere of its Moscow office that allies it closer with its piers in the Silicon Valley, the citadel of high-tech corporations in the United States, its incorporation in the Netherlands, rather than in one of the more traditional venues for Russia’s default locations for their offshore business holdings as well as lack of any links to any established oligarch shareholding ownerships, a feature common among most top-flying Russian companies that have executed IPOs in the country — are some of the unique features that the company management hope would differentiate it from other Russian legal entities and whelp international investors’ appetite for the IPO floatation stocks.

The floatation received the green light to go ahead on Nasdaq after the company gained the approval from the U.S. Securities and Exchange Commission. The volume of stocks on offer — about 16.3% stake of Yandex’s gross worth — came from the company’s principal shareholders Tiger Global, a U.S.-based privately owned investment management firm and Baring Vostok Capital Partners, a Russia-focused private equity firm, as well as from Volozh and Ilya Segalovich, another Yandex co-founder and company’s chief technology officer. The latter duo plans to sell 4.1mln shares and 820,000 shares, respectively, thus decreasing their stakes to 20% and 4%, the company said in a statement.

“Yandex has been exceptionally successful at advancing unique technologies with innovative ideas and solutions on the market and on a global scale.” 

Expectedly, Yandex had the services of the best of international investment banking companies to help it make the IPO project the sparkling success that it turned out to be on Nasdaq. Thus, Morgan Stanley acted as sole global coordinator for the offering. It also teamed up with other global financial heavyweights — Deutsche Bank Securities and Goldman Sachs — as joint bookkeepers, while Piper Jaffray and Pacific Crest Securities acted as co-managers.

Initially, the IPO share price was set at a corridor of $20-$22, but the price instantly shot up by over 42% in the first half day of trading to $35.65 following the traditional opening bell ringing by the company’s executives, a price that valued the company’s capitalization at about $9bln. However, by the end of the day, the price had risen at one point during trade to a record 55.4%, a trend the put the day’s peak value of a share at $42.01, and the company’s capitalization gross worth between $10bln and $11bln, a price-value range that was much higher than the previous target of $8bln declared in the company’s IPO prospectus.

The opening day flotation value is now 500 times the company’s worth when the first private equity investors bought into the company in 2000, and several times the founding charter capital, when the internet search services firm was incorporated in 1997. It, therefore, was not surprising the ‘contagious optimism’ exuded by the company executives and Nasdaq management in New York. “The beginning of Yandex’s IPO on Nasdaq started in accordance with company’s plans and expectations,” Volozh said. “Our shares are now trading much higher than the flotation price, a very fine trend for the first day.” 

Yandex executives have said the IPO proceeds will be invested in teams and further business development, notably technologies and technology infrastructure, etc. Specifically, Volozh noted that the revenue generated via this IPO will be routed into further development of our core business operations by employing more staffs and opening up new offices in new locations, thus enabling us to grow further,” he added. “For our resources users, the benefit includes our company becoming larger, more brand recognition across the world and full internationalization of the company services.”  Segalovich is also of the same opinion, noting the IPO would enable Yandex to have a stockpile of cash, just like its key rivals on the local and international markets. “All our competitors have piles of cash. So we must be prepared for everything.”

Expectedly, Nasdaq management was also effusive in its praise for Yandex in general and its IPO flotation on its turf, rather than competing platforms in London, Frankfurt, Paris, Singapore and Hong Kong. “Yandex has been exceptionally successful at advancing technology with uniquely innovative ideas and solutions at all levels of creation and execution both on Russia's emerging technology market and on a global scale,” Bruce Aust, executive vice president of Nasdaq's Corporate Client Group, noted. 

The floatation’s generous investment revenue generation is a boom for Yandex's private equity investors. Baring Vostok Capital Partners, one of the first strategic equity investors to convince its clients to put their capital in the budding company in 2000. Thus reflecting on the company’s meteoritic rise, Elena Ivashentseva, an expert of Baring Vostok Capital Partners, noted that it was really difficult to explain to investors why investing in Yandex in 2000 was a good idea. Now, as 11 years later and as Yandex's principal shareholder, Baring Vostok Capital Partners has a right to smile for having the strategic vision to hold on to its stake, despite rigid opposition from such its clients and/or unambiguous recommendations to offload it at the first available opportunity 10 years ago.

Unique opportunity for strategic investors

The Yandex IPO came on the hills of another IPO by a major Russian internet company, Mail.ru, the country’s largest social networking site and largest e-mail provider, which debuted on the London Stock Exchange in 2010, and five years after STS Media, a pioneering Russian internet company, put the country on the high-tech globalization trajectory, when it became the first Russian company to undergo IPO on Nasdaq.

While Yandex was not the first Russian internet company to float its stocks on international exchanges, it was its IPO, however, that drew the attention of the world’s biggest investors to the Russian booming Internet market in general, and its search engine services segment in particular, both in terms of revenues generated revenue, now a record for the Russian market, and the number of stocks offered during an IPO. 

The excitement generated by the Yandex IPO stemmed from its overtly evident hegemonic position on the local engines services market, where it controlled almost 65% of the industry’s search traffic services share, attracting over 38.3mln of so-called ‘unique visitors per month. “Investors’ huge interest in Yandex’s IPO, in my opinion, is quite natural, since it is based on a number of powerful fundamental growth drivers of the search engine firm’s business, Tatiana Zemtsova, an analyst at Finam, a Moscow-based investment firm, said. “Yandex is a recognized leader on the Russian online search market, a fact that makes it the main beneficiary of the rapidly growing domestic market for Internet advertising, which grew by 40% in 2010 alone,” she added. “Beside, the high excitement generated by Yandex’s IPO can also be attributed to the so-called ‘pent-up demand’ for the shares of the company, which due to the negative market conditions following the eruption of global crisis, was forced to postpone the launch of its IPO from 2008 to 2011.”

Even Google, the global leading search engine corporation, has so far failed to make any palpable dent on Yandex’s hegemony on the Russian and other CIS markets, despite the fact that the U.S.-based behemoth introduced a Russian-language search engine as far back as in 2001, and followed it up by opening a Moscow-based representation office in 2006. In numerical terms, with a market share of about 22%, or a third of Yandex’s, Google Russia currently trails behind Yandex in Russia, according to Liveinternet.ru, a local Internet company that tracks the market dynamics. Yandex’s business model is driven, amongst others, by online advertisement. For instance, in the first quarter of 2011, the company’s revenue rose stood at 3.9bln rubles, 3.8bln rubles of which were generated from online advertisement, whilst profit was 820mln rubles.

Analysts have attributed Yandex’s overwhelming competitive advantage over Google to the fact that it is better equipped to handle the grammatical complexities of the local language. However, experts expect the situation to change in favor of Google with the ongoing improvement of its Russian language tools. One of these experts is Alexander Vengranovich, a telecoms industry analyst with Otkritie Financial Corp., one of Russia’s leading banking groups, who noted that Yandex has a more transparent and more comprehensible business model that has proved its efficacy in fending off competition from Google. “Almost 90% of Yandex’s revenue comes from online advertisement, a booming market in Russia. In practice, this means that Yandex’s ‘business modus operandi,’ which envisages a scenario of constant growth of key financial performance indicators, is far more stable than the business strategies of competitors, whose prospects are far less attractive.”

“Yandex’s opening day flotation market capitalization value of about $10bln is now 500 times the company’s worth when the first private equity investors bought into the company in 2000.”

It seems that Yandex, buoyed by its success in fending off cutthroat competition from Google over the past decade, is not afraid of the industry’s global leader, at least, on the Russian market. “Google is a great company, but we are better, as we are more focused on what we are doing and that focus is technology and search,” Segalovich said. Such confidence, a solid business model and corporate reputation as a comparatively more transparent company, a rather unique trait for a Russian firm, help explain why international investors see Yandex shares as a unique opportunity to gain a foothold on one of the world’s fastest growing internet-based technology services markets in Eastern Europe. 

This is particularly important, given the fact that Internet penetration in Russia is expected to increase from the current 40%-50% (about 50mln-55mln users) to about 70%-75% (75mln-80mln) over the next four-five years, according to Russia’s Public Opinion Foundation, a Moscow-based polling agency. In practical terms, this means that the country’s online advertisement market will almost triple over the same, thus making it one of the fastest-growing online advertisement markets in the world.

The Yandex IPO could be said to be well-timed, as its floatation came just hours after LinkedIn, a social networking site for business professionals, released details of its IPO plan, expecting to raise up to $274.4mln, and few days after the shares of Renren Inc., one of China's biggest social networking companies, rose nearly 30% percent in their debut on the New York Stock Exchange after raising $743.4mln 

All these happenings are seen as events whipping up global investors’ growing appetite for the much expected IPOs from Internet’s latest ‘wonder project’ — Twitter and Facebook — whose public share sales global investment heavyweights such as Warren Buffett, the chairman and CEO of Berkshire Hathaway, a U.S.-based investment holding conglomerate with its tentacles across global economy, say will explode the high-technology market. 

This view stems from the fact that investments secured by Mark Zuckerberg’s highly successful social-networking company in January 2011 for further business development was based on an estimation that valued the company’s capitalization at $50bln, where February deals with the Facebook shares were concluded at a stock price that valued the company at $84bln. Therefore, it does not come as a surprise that Wall Street analysts expect Facebook’s IPO to overshoot the historic landmark of $100bln, a sum that will break both the existing U.S. and global records in terms of revenues generated via IPO. The reception of Yandex's IPO by global investors only buttressed this line of thought, another evidence that that Internet companies have finally exited the crisis and are again fast becoming ‘investors’ dream assets.’

Yandex’s post IPO future might not be at that rosy

Some experts fear the robust demand for the Yandex IPO shares that led to the company’s successful performance at the opening bell-ringing ceremony have prompted overvaluation of the search engine’s real worth. “The current valuation of Yandex is excessively exaggerated,” Ilya Fedotov, the head of market equity analysis department at Veles Capital, a Russian investment firm, noted. “This because the current appraisal level puts its multipliers, EV/EBITDA and P/E, at 54 and 84, respectively, while the corresponding coefficients for companies with the same fundamentals are traditionally in the range of 3-5 and 10-15,” he added. “The fact that IPOs by done both Russian and foreign IT companies in the recent have been overvalued is a manifestation of a bubble sentiment among investors, a trend reminiscent of the negative market dynamics that heralded the dot.com bubble boom and bust in the 1990s. Consequently, these trends make investments into such equities a highly risky venture.”

Others say international investors have failed to learn the needed vital lessons from the post- IPO activities of other IT companies that have fared mostly below expectations in the their post-IPO eras. “For instance, from the excitement over the Yandex share floatation, it is evident that investors have not learnt their lessons from Mail.ru, whose stake only rose temporarily higher above the placement value, while most of the time the share value has been about 15-20% less than the floatation figure, Georgy Voronkov, an analyst with Invest Cafe, an independent business analysis agency, said. “Based on this reason, I would not recommend investors to buy into Yandex.”

Analysts’ open skepticism is not the only issue that is likely to mar Yandex’s operations in its post-IPO era. Indeed, the company’s management was very explicit in its IPO prospectus on the types of risks looming around the corner. Specifically, the company warned potential investors of the possibility of its being subject to ‘aggressive application of contradictory or ambiguous laws or regulations in Russia,’ including tax regulations and license requirements by the local authorities. 

Besides, the so-called ‘golden stock’ with a nominal value of one euro held by Sberbank, could be used to prevent any single investor from buying a voting stake of over 25% in Yandex, thus limiting investors’ appetite for the company. Another issue is the likelihood of a dual listing in Russia in accordance with the local law that requires companies floating their shares abroad to do same on the domestic market. However, the biggest risk, according to the company, is being a potential ‘raid target’ by aggressive takeover efforts mounted by well-funded and highly politically connected financial groups affiliated with so-called oligarchs that it might not be able to avert.

But the good news for Yandex from its  successful IPO on Nasdaq is that the company today, in its new post-IPO corporate status, cannot easily be pushed around anymore by local bureaucrats, oligarchs and their stooges acting as corporate raiders as they will certainly face reprisals in forms of international uproar and vindictive litigations across the globe. And, since most of these influential people have the lion’s share of their financial assets stored away in foreign locations under the jurisdictions of international arbitration courts, the fear of such courts freezing their assets or disclosing them is enough to put them off from Yandex.