Shares of Yandex NV, known as "Russia's Google," rose 55 percent in their trading debut, evidence for some investors that Internet companies have strong prospects and a confirmation for others that the market has gotten ahead of itself.
Demand for Yandex was strong -- a source said that investors sought to buy 17 times as many shares as Yandex and its owners made available. However, there is some investor concern that IPO valuations for Internet companies are higher than their earnings prospects warrant.
Beyond that, it could prompt a rush of less able companies seeking to tap the same kind of investor demand that fueled the dot-com boom of the late 1990s.
Shares of Yandex, the biggest Internet IPO in the United States since Google Inc nearly seven years ago, were up 55 percent at $38.84 at the close of trading on the Nasdaq.
"Google is a great company, but we are better," co-founder and Chief Technology Officer Ilya Segalovich, 46 told Reuters after the company's debut, with a smile. "We ... are very focused on what we are doing and the focus is technology and search."
The IPO comes a week after professional social networking company LinkedIn went public. Investors more than doubled that company's stock price on its first day of trade.
It also comes as Wall Street speculates about when social networks Facebook and Twitter will go public. Yandex's IPO provided more evidence that Internet companies are hot again.
"I certainly think that investors have put caution on the back burner," said IPOfinancial.com President David Menlow. "Now there's a perception that we are in a new bull market as it relates to technology stocks," adding that there is a particularly strong appetite for social networking companies.
"Yes I do think we are moving toward a bubble mentality in this sector," said Menlow. However he added that investors would be "somewhat discerning with what they put their money behind and not every technology stock that files is going to receive this sort of reception."
Yandex raised $1.3 billion in its IPO, selling 52.2 million shares for $25 each. It valued the company at about $8 billion. Morgan Stanley, Deutsche Bank Securities and Goldman Sachs & Co led the underwriters on the offering.
"Yandex has good growth to date, and I think they will in the future," said IPOdesktop.com President Francis Gaskins. "Investors are hungry for growth wherever they can get it, whether it isRussia or elsewhere."
Trip Chowdhry, an analyst at Global Equities Research, said, however, that he thinks Yandex's fundamentals are strong but that the valuation is not.
"It is very obvious the investors are going crazy over the names because they are thinking it's a new Google. That is wrong thinking. Yandex is not going to be global. They haven't shown anything that convinces me they have reach beyond Russian geographical boundaries," Chowdhry said.
Yandex has not decided how to use the money it made in the IPO, but it is important to have large cash balances, just like the company's rivals, said Segalovich. "All our competitors have piles of cash -- huge piles -- and we must be prepared for (all) kinds of things," said Segalovich.
Yandex's business model is driven by online advertising. In 2010, profit rose 90 percent to 3.8 billion rubles ($134 million) on sales that grew by 43 percent to 12.5 billion rubles ($441.3 million).
Analysts say that the search engine devised by Segalovich and co-founder Arkady Volozh, 47, has a competitive advantage over Google because it is better equipped to handle the grammatical complexities of the Russian language.
For the company to grow, it must defend its market share in Russian search, now at 65 percent against Google's 22 percent.
GOLDEN SHARE
The investment is a boom for Yandex's private equity investors. Baring Vostok Capital Partners bought into Yandex in 2000, when it had revenue of just $72,000 and lost $2 million.
The fund's original investment valued Yandex at $15 million, meaning that the float values the business at more than 500 times that level.
Investors buying into Yandex's IPO will receive Class A shares, which only have one-tenth of the voting power of the Class B shares, which insiders in the deal will retain.
Also, a golden share held by Sberbank, the state-controlled Russian bank, could be used to prevent any single investor from buying a voting stake in Yandex of more than 25 percent.
Segalovich and Volozh, who met as schoolchildren, said the IPO would help put Russia on the map as the birthplace of a global technology company.
"Russia is famous for its resources," Volozh said in an interview. "But Russia also has a lot of talent ... So far, there aren't many technology companies ... that would work for the entire world. We believe that the scientific culture of Russia is so strong that sooner or later such a company will appear."
Segalovich said he and Volozh would celebrate the IPO by flying back to Russia from New York after a punishing two and a half weeks of investor meetings.
"(We've been) meeting investors ... to explain what Yandex (is) ... is it real or not, is it fake?," said Segalovich. "No, it's not fake, it's real people ... You can touch them."
