Actuality, February, 13, 2007

According to the results of 2006 Russia occupied the fourth place on IPO (initial public offering of companies’ stocks on the stock exchange) and left behind Japan, but passed forward China, the USA and Great Britain. Foreign investors buy up Russian enterprises’ and corporations’ securities. The Russian companies have started allocating stocks on the stock market one by one. According to the experts, 20 Russian companies sold stocks on $17,5 – 21 bln in the previous 2006. This figure equals the Russian debt to the Paris Club, that is $25 bln and it has been the government debt till recently. Moreover, Rosneft has recently hold the “public IPO” for $4,5 bln. Its stocks have been sold not only on a stock exchange, but also in the Sberbank branches. New Russian companies’ IPO are waited on the London Stock Exchange (LSE). According to Chris Gibson-Smith, the LSE chairman, in 2007 the amount of the Russian companies’ IPO on LSE will be the same as in 2006. He adds also that eight Russian companies hold IPO on LSE and attracted about $13 bln in 2006.

IPO allows to attract big financial resources on almost irreversible basis that can be used for business development in sight. But in case of IPO participation on a stock exchange, the investor bears an additional risk. While buying any stocks, the investor starts to bear a risk of their falling price at once. If the offering occurs with a price lower than the market one then one can sell the received stocks more expensive in the open market than having bought them at the offering or on the contrary. But it is possible to imagine, for what purpose the investors risk deliberately. For example, for the last 2006 the RTS index has increased by 65%, that is, in other words, average Russian stocks investments. Meantime the average bank deposits yield was 8,5%.

Examples of successful Russian IPO
Russian “blue chips” were the first to enter the USA public securities market through the IPO mechanism. They were Vympelcom, Tatneft, Rostelecom, Golden Telecom, Mobile Telesystems. Their debut on the stock market was quite successful, especially IPO of MTS. Its stocks listing in the ADR 3-rd level form was organized on the New York Stock Exchange (NYSE). The company IPO subscription exceeded the amount of stocks issue 6,5 times in June, 2000. As the result, there were attracted $353 mln that were directed to the farther development of the company and its regional presence expansion. The stock price was $21,5 at the issue moment. It was $34,1 in September, 2003. The company capitalization increased up to $3,38 bln.

It is interesting, that in spite of the recession in the USA telecommunication sector the MTS stocks increased by 20 % in comparison with the enter price to the stock exchange in 2000-2002 while the Telecom HOLDRs bank basket of Merrill Lynch decreased by 50%.
As a result, MTS was the only company that succeeded to grow with the initially announced price. In this situation won both the issuer, who has received the maximum that could be predicted, and the investors, who have received the safe security that also managed to increase by many times and became the “blue chip”.

Prospects
Now it is profitable to enter the Russian IPO market. However, according to the experts’ predictions, the initial public offerings will not be so popular in two years. This is because of oil prices and political risks. In fact 2008 is the year of president elections. That’s why Russian companies entered so actively the market whithin the last two years. If the prediction came true then instead of offerings there would be stock issue, financial or strategy investor attraction and business sale. But if the company has decided to hold IPO, it is better to do it in the internal market. Since the IPO hold costs in Russia are less than abroad and the company is known better among Russian investors than among by foreign ones.

Costs for IPO hold
(Calculations of theMICEX)
The MICES organizational costs total 2-4% from the offerings volume, including the uderwriter services (1-3% from the offerings volume), taxes (0,2% from the volume), commission costs (up to $10 000), PR-campaign ($10 000-50 000). The organizational costs on the foreign markets are 5-10% from the offerings volume, including the uderwriter services (up to 5-7% from the offerings volume), dues, fees and commission (up to 1-2% from the volume), PR-campaign and Road Show (up to $1mln.).
It is known that one should have a legal business in order to hold IPO successfully. Since the 90th the Russian tendency in business was closely connected with the fact that companies’ owners were not exactly open to the law and especially to minor stockholders.