Yandex Jumps on First Trading Day in Biggest 2011 Tech IPO

May 25, 2011, 11:20 AM EDT By Zijing Wu and Lee Spears

(Corrects date of Boston Consulting report in 10th paragraph in story that ran May 24.)

May 24 (Bloomberg) -- Yandex NV, owner of Russia’s most popular Internet search engine, jumped 55 percent in Nasdaq Stock Market trading after raising $1.3 billion in an initial public offering that sold above the proposed price range.

The shares, trading under the symbol YNDX, rose $13.84 to $38.84 at 4 p.m. New York time. The Moscow-based company sold 52.2 million shares, or a 16.2 percent stake, at $25 each, above the proposed range of $20 to $22, valuing the company at about $8 billion, Yandex said in a statement today.

Today’s debut for Yandex, which has almost triple Google Inc.’s market share in Russia, is the biggest technology IPO worldwide in 2011 as companies file for U.S. offerings at the fastest pace in seven years. The rally adds to evidence of a boom in demand for Internet stocks after Mountain View, California-based LinkedIn Corp. more than doubled on its first trading day last week.

“What you saw with LinkedIn really raised the temperature for these kinds of deals,” said Ryan Jacob, chief investment officer of Jacob Asset Management in New York. “Even though the market as a whole has been mixed, there is still an appetite out there to invest in early-stage companies.”

The company sold 15.4 million shares, and some of its investors offered 36.8 million shares in the IPO. Yandex has also given its underwriters an option to purchase an additional 5.2 million shares.

Yandex, Google

Based on the $21 a share midpoint of the initial offer range, Yandex had planned to sell shares at a price equivalent to at least 23 times next year’s earnings, two people involved in the sale said this week before pricing was announced. Google trades at about 13 times estimated 2012 earnings.

Online advertising in Russia climbed 51 percent from 2008 through 2010, when it reached 26.65 billion rubles ($940 million), according to the Moscow-based Association of Communication Agencies. Spending on print ads plunged 41 percent in the same period, while the radio and television segments fell 21 percent and 6 percent, respectively.

Yandex, co-founded by Chief Executive Officer Arkady Volozh and registered in The Hague, makes most of its revenue from advertising.

‘Huge Room’

“We still have huge room to grow,” Volozh said in an interview with Bloomberg’s “In Business with Margaret Brennan.” “The Russian advertising market is projected to triple in the next several years, and we also have nearby markets.”

Russia’s Internet industry, the largest in Europe after Germany by users, is experiencing “rapid growth” and may account for 3.7 percent of gross domestic product by 2015, more than double the industry’s contribution in 2009, the Boston Consulting Group said in a report released May 19.

“Search is the most easily monetizable part of Internet advertising, so the prospects actually look quite good” for Yandex, said Jacob, the portfolio manager.

Russian President Dmitry Medvedev, who posts to online blogs and visited the San Francisco offices of Twitter Inc. during a trip to California last June, has made “modernization” a priority of his administration.

About 70 percent of the stock in the Yandex IPO comes from existing investors, including Baring Vostok Capital Partners and Tiger Global Management LLC, according to the company’s filing.

‘Google of Russia’

Proceeds from the sale will be invested in technology, infrastructure and possibly acquisitions, the company said in the prospectus.

Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc. led the offering.

LinkedIn, the first major U.S. social-media company to go public, sold 7.84 million shares at $45 apiece in its IPO last week, raising $352.8 million. The exercised an option to buy additional shares two days later, boosting the offering size to $405.7 million.

At least 230 companies have announced plans for U.S. IPOs so far this year, more than the same period in any other year since 2004, when 232 companies were on file, data compiled by Bloomberg show.

“Yandex has picked a great time for an IPO for a tech company,” said Anthony Moro, managing director and head of emerging markets at Bank of New York Mellon Corp., which has about $1.1 trillion in assets under management. “For the longer term, they’re in the right spot. They’re the Google of Russia.”

--With assistance from Ryan Flinn in San Francisco, Maria Levitov in London, and Jason Corcoran in Moscow. Editors: Lisa Rapaport, Tom Giles

To contact the reporters on this story: Lee Spears in New York at lspears3@bloomberg.net; Justin Doom in New York at jdoom1@bloomberg.net.

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net.

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Yandex Says <em>Nyet</em> to Google and <em>Da</em> to Nasdaq

Arkady Volozh

By Julia Ioffe

Arkady Volozh, the founder and chief executive officer of Russia's dominant search engine, Yandex, seems comfortable being the outsider. He's one of Moscow's wealthiest people yet still drives his own car, a Volvo SUV, in a city of chauffeured Bentleys and Maybachs. Despite Russia's penchant for nepotism, for years Volozh refused to hire his oldest son and insisted he find a job on his own. He "is not very ostentatious or grandiose at all, which is why he wears well," says Esther Dyson, a venture capitalist and Yandex board member.

He may be tempted to live a little larger after May 24, when Yandex is expected to raise around $1 billion in an initial public offering on Nasdaq (NDAQ). Most of Russia's successful companies are those that dig—for oil, nickel, aluminum. Others are tainted by accusations of corruption or intellectual-property theft. Yandex seems to be an exception: a homegrown market leader that leveraged Russia's math and engineering talent in pursuit of technological breakthroughs. According to research group LiveInternet, its search engine now accounts for 64 percent of the Russian market to Google's 23 percent, and Yandex is hinting at ambitions abroad. For foreign investors, the question will be whether the Kremlin leaves the company alone.

Volozh and his high school friend, Ilya Segalovich, started working on search in the early 1990s. Their Internet search engine went live in 1997, and Yandex, which stands for "yet another indexer," became an independent company in 2000. Revenue has doubled every year since, and in the first quarter of this year, Yandex brought in $137 million, almost entirely from ads, according to its prospectus.

Part of the explanation for Yandex's success is first-mover advantage. Google (GOOG) didn't open a Russian office until 2005. Volozh and Segalovich began work on their indexing technology before Sergey Brin and Larry Page had even met, and they added maps, news search, and Web mail to Yandex's offerings years before Google did. Yandex "has outpaced the big, brand-name Internet companies," says Web pioneer Anton Nossik, who founded popular Russian news sites. It "did this by thinking about what was needed here, in the domestic market, and not what was already available."

Being native Russian speakers helps. Yandex's algorithm accounts for the intricacies of Russian grammar, where the same word can have dozens of different endings depending on its place in a sentence. It can, for instance, recognize the word "field" ("polye") even when it appears in a phrase like "lilies of the field" ("polevye lilii"). Google couldn't do the same until 2007.

Talk of a Yandex IPO first surfaced in the summer of 2008 but was stymied by the global economic crisis, when Yandex reported that ad revenues fell by more than 40 percent. Yandex executives would not comment for this story because of Securities and Exchange Commission rules requiring a quiet period before the IPO. In its prospectus, Yandex warns investors that "well-funded, well-connected financial groups" in Russia occasionally use "economic or political influence or government connections" to take over independent companies. "Our ability to thwart such efforts may be limited," the prospectus reads.

Yandex would know. In 2008, Alisher Usmanov—an Uzbek mining oligarch and longtime ally of Russian President Dmitry Medvedev—said he tried to buy a 10 percent stake in Yandex but was rebuffed. According to local press reports, the following year the Kremlin forced Yandex to sell a "golden share" to a state-owned bank for one euro. The share gave the bank, and by extension, the Kremlin, power to veto any acquisition by a foreigner of more than 25 percent.

There was more Kremlin interference in 2009, when a video showing the beheading of a Russian soldier by rebels in the restive North Caucasus made it into Yandex's top blog search results. According to a top Yandex executive, the Kremlin's first deputy chief of staff, Vladislav Surkov, called Volozh to complain about the material because it was unpatriotic. Volozh replied that the search results were automatically generated. Surkov was not convinced, according to the same source, and forced Yandex to remove the blog rankings. Afterward, Surkov toyed with the idea of creating a "national" search engine controlled by the Kremlin, according to local press reports. Surkov's office did not respond to requests for comment. A Yandex executive interviewed in December 2009 says the company was slow to grasp the importance of lobbying but has begun to take it seriously; Volozh now meets regularly with Surkov.

Yandex says in its prospectus that some of its IPO funds will be used to expand internationally. Asaf Homossany, who heads Nasdaq's global markets, says it could be a new era for Russian enterprise. "We've passed the peak of these giant resource companies entering the global market," he says. Up next are the Russian tech companies.

The bottom line: Yandex has stepped up its lobbying to cope with political pressures at home. Some of its IPO funds will be used for international expansion.

Ioffe is a Bloomberg Businessweek contributor.

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