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Yandex Says Nyet to Google and Da to Nasdaq


Russia's homegrown search engine is going public with a $1 billion IPO

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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