Yesterday I mentioned that M&A activity is being driven by more activity in emerging markets such as China. I also focussed on the apparent tech-bubble forming around the stock issues of firms like Skype and LinkedIn, as they attract a takeover from Microsoft in the case of the former and stock market flotation for the latter. I’ll continue looking at some of the highest profile flotations today, noting that many of the companies will only be well-known to consumers in their domestic market and analysts handling the stock market float.
Firstly, though, let’s remind ourselves of the reasons why this kind of activity takes place at all. What benefits do companies want to secure through a stock market flotation? The flotation of Russian internet firm Yandex gives plenty of clues: Yandex is Russia’s favourite search engine, with an estimated 65% share of the search market in that country. The firm behind it is unusual in terms of technology firms as it has already turned a profit – something singularly lacking in many tech-companies such as Skype or Facebook.
An initial public offering (IPO) from Yandex was launched on the New York Stock Exchange yesterday. It is thought to be the biggest US IPO since that of Google back in 2004. Investors rushed to buy into the company, spurred by the prospects for growth in Russia’s internet market and buoyed by the excitement generated by LinkedIn’s successful float last week. Yandex’s IPO raised an estimated $1.3bn. The company plans to use the capital raised to give it more financial flexibility (less dependent on loans for funding expansion) and to enhance its profile. By being publicly quoted on an international stock market, firms such as Yandex gain prestige and consolidate their strong position in their domestic market.
New Yandex investors have bought shares with only a tenth of the power of existing stock owners such as private equity investors, the firm’s founders and state-owned Sberbank. This golden share is aimed at preventing any single investor from holding more than a 25% stake in the company. The IPO is a money-maker for the banks and advisers involved in the deal, including Goldman Sachs, Morgan Stanley and Deutsche Bank.
Yandex’s IPO brings to mind the launch of the firm behind China’s internet search engine, Baidu in 2005. Baidu’s New York Stock Exchange IPO came at a time when China’s potential internet growth was unfulfilled, with less than 10% of the population online. Its launch raised an estimated $109m. Once again investment bankers Goldman Sachs were involved, along with Credit Suisse First Boston and Piper Jaffray. Concerns about the investor advice issued by Goldman brought the spotlight onto the bank, not the only case of analysts querying the power of the company to drive the market.
Why do some companies prefer a stock market flotation sometimes to M&As? As can be seen in the case of Baidu, LinkedIn and Yandex, when a firm goes public (floats its shares on a publicly quoted stock exchange), it often experiences an increase in its valuation. As a public company a firm has increased liquidity and can raise capital more easily. A public firm can also use its stock market listing to promote its products and brands in new and existing markets. Finally, as in the case of Yandex, a firm's original owners can retain at least some of its control by issung an IPO. Even though a merger or acquisition can be carried out faster than a stock market listing, it can prove difficult to avoid losing control to another company without engaging in often complex negotiations.