Russia's invasion of Ukraine has caused a tsunami of M&A deals as Russia’s private companies scramble to restructure their businesses to account for tectonic changes in the business landscape. It has cost everyone a lot of money as owners have been forced to sell off businesses exposed to sanctions or in many cases the leading lights of Russian industry has been forced into early retirement by personal sanctions that have de facto forced them out of the firms they founded. Maybe the biggest victim of all is Yandex, Russia internet giant and the most valuable tech company in Europe.

The company’s market capitalisation has already been halved, costing investors billions of dollars, and the fire sale that is about to start will probably cost them hundreds of millions of dollars more. And that is just the financial cost: Yandex has been a beacon of success in the modern Russia, a world class company that has out googled Google. The restructuring will rescue a lot of value and create a serious business, but the dream that a Russian tech firm could not only hold its own in direct competition with the best that America has to offer but even win is being comprehensively destroyed.

Yandex remake

The Netherlands-based parent company Yandex NV announced on November 25 it will divest its Russian assets in an effort to unblock its Nasdaq listed shares and allow its international shareholders to exit.

The Dutch holding will keep most of the group’s international assets and will be headed by Yandex founder Arkady Volozh, while former finance minister Alexei Kudrin will temporarily head the “Russia Yandex” that will own all the Russia-based businesses and be sold off to local investors.

A special committee of the board was set up to “explore a variety of potential scenarios and steps including:

“Development of the international divisions of certain services (including self-driving technologies, cloud computing, data labelling, and ed-tech) independently from Russia.

“Divesting Yandex N.V.'s ownership and control of all other businesses in the Yandex Group (including search and advertising, mobility, e-commerce, food-delivery, delivery, entertainment services and others in Russia and international markets), including transferring certain elements of governance to management.”

The company cited “the current geopolitical environment” as the reason for the changes that would in effect break up not only one of Russia’s most successful tech companies, but the leading tech company in all of Europe. Yandex’s market capitalisation on the eve of the invasion of the war was $12.7bn, which has halved to $6.7bn as of November 28.

Yandex NV has a total of some 10,000 significant shareholders, most of whom are international portfolio investors, according to bne IntelliNews sources close to the company. Trading in Yandex shares was suspending shortly after the war in Ukraine started, leaving its shareholders trapped as financial transactions with Russia have been halted; the Russian National Settlement Depository (NDC), the main custodian, has been sanctioned, blocking its connections with international banks.

Amongst the options being considered is to keep the international divisions of certain services, including the self-driving cars, cloud computing, data labelling and education technology in the Dutch vehicle Yandex NV "independently from Russia" and sell the Russian assets, including its main search engine, to Russian investors. The Russian business is the more valuable and also includes business in advertising, mobility, e-commerce, food delivery and others.

The board of directors also said that Yandex NV will be renamed "in due course", with the divested business keeping exclusive rights for the use of the Yandex brand.

"These are exceptionally challenging times," John Boynton, Yandex's chairman said. "Please be assured that as we analyse different strategic options, we will do everything possible to protect value for our public shareholders and preserve opportunities for the 20,000 employees who have made Yandex one of Europe's most successful technology companies," he said as cited by East West Digital News.

The bne IntelliNews source said that the restructuring is still at a preliminary stage as many hurdles still need to be cleared, but the appointment of Kudrin, who is a close personal advisor to Russian President Vladimir Putin, as a Yandex board member has been taken by observers as indicating that the Kremlin is committed to doing a deal.

Kudrin is the architect of Russia’s liberal market reform programme and seen as probusiness. It is believed that he will argue that it is in the country’s interests not only to keep Yandex as a privately owned company and to prevent any of the large state-owned enterprises from scooping the company up, but instead for a diversified group of investors that will have the commercial interests of the company at heart and that will also be acceptable to the Russian management who will be given a free hand to develop the business further, according to bne IntelliNews sources close to the deal. However, none of these details have been formalised yet.

For the international investors, a deal will end the dream of owning part of “the Russian Google” as this part of the business will remain in Russian hands. They will in effect be left with a portfolio of very valuable assets, but not in the core search and e-commerce segments that they originally bought.

“If the deal goes through then the international investors will retain some very valuable assets like the self-driving car business, but the Google of Russia part will be sold off,” a source close to Yandex, who didn’t want to be named, told bne IntelliNews. “The investors will get paid for this as the Russian business will be sold by Yandex NV, so they can take some money out, but then they have to decide if they want to stay in as the nature of the business will have changed.”

While in theory it is possible for Yandex NV to sell its Russian assets to local investors in dollars that can be repatriated, in practice any international transfer of on this scale needs special approval by the Central Bank of Russia (CBR). Given the current CBR governor Elvia Nabiullina used to work for Kudrin, his appointment to husband the deal through is also taken as a sign that the CBR approval for repatriating any money paid by the Russian investors for the Russian business will be approved. However, as the CBR has a de facto veto over the deal, some worry that this leverage will be used to cap the price, and the sale of the Russian assets could happen at a deep discount to the previous market value.

There is also a question mark over the technology transfer permissions involved in splitting off the Dutch entity as currently regulations call for the government’s approval to transfer any Russian-registered technology licenses out of the country, the New York Times reported the same day, citing a person familiar with the matter.

Yandex went public on the Nasdaq back in 2011 with an $11bn valuation, and has been an investors’ darling in recent years, significantly outperforming the rest of the market. The company’s business was immediately hit by Russia’s war on Ukraine.

On February 28, after the stocks of Russian tech companies, including Yandex, fell sharply, Nasdaq stopped trading them due to regulatory concerns.

In mid-March, Yandex announced it was exploring different “strategic options, including disvestment” for a range of its assets.

Soon afterwards, the company’s delivery and mobility activities were stopped or threatened in the US, UK, France, Latvia and Estonia.

In March and June, respectively, the company’s deputy CEO Tigran Khudaverdyan and its founder Arkady Volozh were sanctioned by the European Union, but not the company itself.

In April, to avoid a default, Yandex scaled back many planned investments and withdrew its financial guidance for the year.

In August, Yandex did sell its news service and homepage to its archrival VK Company — which is even more under Kremlin control than Yandex itself.

By the summer, compromises with the authorities led the company into a trap. Yandex was divided internally, as “some top managers left the country and are trying to salvage what they can from abroad; while others remain in Moscow and are determined to save Yandex’s Russian business,” local media reported.

Amid these events, a significant fraction of the 19,000 staff left the company or were moved to such other countries as Serbia or Uzbekistan. By August, over 10% of the employees had left, reported Bloomberg.

VEON/VimpleCom in a copycat deal

In a very similar deal to the mooted Yandex restructuring, the Dutch telecoms holding Veon has agreed to sell its daughter company, the Russian mobile phone operator VimpelCom -- operating under the Beeline brand in Russia and one of the big three companies – to the its Russian top management, Veon and VimpelCom said on November 28 reports Vedomosti. The deal is expected to close by early June 2023.

"A group of top managers of the company, headed by CEO Alexander Torbakhov, has entered into an agreement to buy the company from the Veon holding," VimpelCom said as cited by the Russian daily. 

VimpelCom is an iconic telecoms company in Russia as it was the first to set up a mobile phone operation in post-Soviet Russia and used to charge $5,000 a month-plus connection fees when it first appeared. It has, like Yandex, gone on to be a pioneer in telecoms services to the Russian public and is a household name.

In addition to Torbakhov, the buyers will be Beeline executive vice presidents Svetlana Kirsanova (for retail business), Maxim Zaikov (for corporate business development) and Valery Shorzhin (for network technological development), as well as Renat, vice president for corporate development, mergers and acquisitions Nasretdinov, specified in the statement.

“In accordance with the terms of the agreement on the transaction, Veon will receive RUB130bn from the sale of the asset. The transaction is expected to be completed no later than June 1, 2023, with the parties entitled to extend this period if the necessary licenses and regulatory approvals are not obtained,” the release notes.

The transaction is planned to be formalized for the company Copernicus-Invest 3 JSC, Veon said in a statement. This legal entity was registered on November 14, its sole owner and CEO, as of November 24, is Torbakhov, according to SPARK-Interfax.

Separately, the provisions of the transaction spell out possible scenarios according to which the asset may come under the control of third parties over the next 30 months from the date of closing the transaction, follows from Veon's statement. In particular, if the shareholders of the Russian business decide to resell it at a higher price during this period, Veon will be entitled to part of the proceeds from this transaction, the Dutch company said in a release. If control in the acquiring company passes to third parties, the agreement “provides the right to terminate the transaction in favour of Veon,” the Dutch holding said in a statement.

Kremlin encroaching on RuNet

One of the businesses that Yandex NV will keep is the self-driving car enterprise into which it has invested heavily and is currently amongst the world leaders in this technology.

Driverless vehicles developed by Yandex  hit 1mn miles of test drive mileage in Russia, the US, and Israel, the company announced in October 2019.

"This important milestone firmly establishes Yandex as Europe’s largest driverless car developer, ranking the company in the top five autonomous vehicle companies globally, which have completed this distance," Yandex said at the time, adding that the group conducting the tests also includes Waymo, Cruise Automation, Baidu and Uber.

That put Yandex amongst the top five experimental self-driving car startups at the time. The mileage of Google's driverless subsidiary Waymo in 2019 was 12.9mn km, while all of its testing fleet has a mileage of 29mn km. The subsidiary of General Motors Cruise Automation had 0.9mn km mileage in 2018 and 2017, while Uber Technologies claimed to have reached 2mn km in 2017.

Most of the mileage for Yandex was done on actual public roads in live traffic, most of it in Moscow and Tel Aviv since 2018. All of the tested vehicles bear the names from the science fiction series Westworld. In 2020 Yandex doubled its fleet of driverless cars to  200. Before the war, operational self-driving taxis in Moscow were seen by analysts as possible by 2024.

Yandex NV is also a major player in the international cloud computing business.

One the other side of the coin Yandex Russia has sold some its businesses, the news aggregator Yandex:News in particular.

Yandex closed a deal to sell the news service, as well as media company Yandex.zen, in August this year to arch rival VK for an undisclosed sum.

The deal will allow Yandex to exit the Russian news aggregation sector, which was presenting the company with problems at home and abroad, as it was accused of filtering its news offering to promote the state’s propaganda associated with the war in Ukraine. In its defence, Yandex said that there was a ban on promoting international or opposition media so all only news available to the service was state-backed news and hence had a built-in pro-government bias. The company hoped by getting out of the news aggregation business entirely it could solve this problem.

A press release on Yandex’s website said: “As sole consideration for these assets, Yandex LLC will acquire 100% of the food delivery service Delivery Club,” the statement added, naming a highly successful and apolitical food delivery e-commerce business that belonged to VK.

The News and Zen platforms had been something of a thorn in Yandex’s side for the last year. The former is an aggregator of news materials which receives over 10mn daily visitors. The latter is a TikTok style personal recommendations platform that uses machine learning technology to present a user with suggested posts. Yandex.zen had over 22mn active users a day in 2021. Delivery Club couriers will join the Yandex Pro technology platform, but Yandex hopes to maintain the Delivery Club brand rather than merging it with its own ultrafast delivery service Yandex Eats.

VK caught the headlines after it was taken over by Vladimir Kiriyenko, the son of the former prime minister Sergei Kiriyenko and the head of Putin’s presidential administration. While the other tech companies, including Yandex, have been scaling back their investment programmes since the war started, VK has gone on a buying spree, snapping up distressed bargains like Yandex:News, leading some to speculate that the Kremlin is using VK as a vehicle to increase its control over the Internet, something that the Kremlin has always ignored until recently, and leaving online news as a major hole in its ability to control the information flow for regular Russians.

The Kudrin connection

Many commentators have remarked on the possible significance of Kudrin’s appearance in the Yandex saga. The day before Yandex announced it would possibly sell its Russian assets, Kudrin met with Putin and approved the scheme for dividing Yandex’s assets into Russian and international parts, two sources familiar with the talks told the Russian news outlet The Bell.

While most of the details of what the new Russian Yandex will look like remain vague, according to The Bell the domestic part will be headed by a new structure headed by Kudrin and those members of the original Yandex management team that chose not to leave the country. Shares in the Russian Yandex will be offered to leading local businessmen, and oligarch Vladimir Potanin who owns NorNickel has been named as one possible investor, according to The Bell. The new Russian Yandex will also have some international projects, including an African version of its leading Yandex:Taxi service.

The Bell reports that Kudrin, who currently heads the Accounts Chamber watchdog and remains a leading economic planner for the Kremlin, helped Volozh to agree on a plan to cut Yandex’s business up with the Kremlin. On the night of November 25, he had a final meeting with the president to sort things out. In gratitude for his services, Kudrin will receive a position at Yandex and about 5% of the company's shares, worth several tens of millions of dollars.

Business is good

Despite the geopolitical machinations, business is flourishing for the Russian part of Yandex’s business. Earlier this month, Yandex reported third-quarter earnings of $2.02 per share on $2.32bn in revenue as all of Russia’s online businesses have seen a bump in demand from the war in Ukraine.

Despite the fallout from the military invasion of Ukraine, both Yandex and VK have seen their revenues boosted this year and Yandex’s profits tripled. Yandex maintained a high top line from its anchor Search & Portals segment in 3Q22. VK was supported by its social network and media assets. “Yandex and VK showed continuation of very strong ad revenue trends in 3Q22. Yandex’s Search & Portal revenue (a key source of its ad revenue; 46% of Yandex’s top line in 3Q22) grew 45% year on year, even accelerating from 29% in 2Q22 and 24% in 1Q22,” BCS GM analysts said in a note last week. “VK’s ad revenue (60% top line after the announced sale and deconsolidation of the gaming business) was up 29% excluding the gaming business versus a total growth of 28% in 2Q22 and 6% in 1Q22,” BCS GM wrote.

“We note that such a positive impact is a one-off, and, assuming status-quo in competition, the companies’ ad revenue should return to a more normalised growth pattern in 2Q23-3Q23 (as comparison base evens out), back to tracking GDP performance,” BCS GM believes.

Russia’s largest e-commerce operator Wildberries also posted 95% year-on-year growth in gross merchandise volume (GMV) in 3Q22 and 9M22, with the GMV recording RUB420bn ($7bn) in the reporting quarter.

Major Russian e-commerce marketplaces streamlined their supplies of the so-called “parallel imports” for goods that are no longer officially distributed in Russia. As a result, Russians have turned to e-commerce sites to buy now hard-to-find foreign brands, and e-commerce sales volumes expanded 1.5-fold y/y in 1H22 to RUB2.2 trillion ($36.4bn).