Top-Manager - April 12, 2005

Why did you decide to attract funds through an IPO?

The decision to hold an IPO was taken at the end of 2000. RBC's management first and foremost considered two factors: the condition of Russia's economy and in particular the domestic stock market, as well as the financial situation and prospects of the company itself. The Russian stock market was showing good results - especially amid a recession in the USA, an unstable situation in the euro zone's economy, and a worsening of microeconomic figures in countries with economies in transition. Since early 2000, the macroeconomic situation in Russia has visibly started to change for the better; optimistic forecasts concerning economic growth in Russia have appeared; ratings agencies have begun to increase Russia's sovereign credit rating; a balanced budget policy has appeared, and the public has set about discussing the corporate governance code. All these factors have positively affected the stock market. In addition, by the time it issued its shares on the market, the company was well prepared in terms of both its financial figures and the quality of its financial statements made in accordance with international standards.

We hoped that the IPO would allow RBC to attract funds for the development of strategically important projects. We wanted to receive "gratis" cash, the image of a public company, capitalization management… An IPO offers many advantages. In addition, we did not just want to attract capital, but also to retain independence. This is a matter of principle, especially in our case, for a company with its own media business. Placement of shares and raising funds on the open market by doing this is the only way to avoid control over our business and editorial policy.

How do you assess the results and to what extent were your expectations met?

We were confident of success but the results exceeded our expectations. The market welcomed RBC's experience with animation. The shares sold well. Demand for them exceeded supply fivefold. As you will already know, during the IPO, which took place on April 18, 2002, RBC sold 16m shares to investors. The shares were simultaneously placed on the stock section of the Moscow Interbank Currency Exchange and the system of guaranteed quotes of the Russian Trading System. The accumulated funds totaled more than $13m; the company's capitalization amounted to more than $80m. RBC ranked 5th in the "Expert-200 Capitalization rating" of the companies most optimistically assessed by investors.

RBC's initial offering was an IPO typical not only for Russian exchanges. We tried to strictly follow the standards of western placements: offering circulars, research, road shows, and disclosure of financial information.

I would emphasize pre-IPO financing as one of the key stages of preparing an IPO. In November to December 2001 we successfully released convertible bonds for western investors. This helped us understand the reaction of potential investors and make sure that RBC's securities were attractive for them. Since we are interested in Russian as well as foreign investors we decided to hold a set of road shows oriented towards both audiences. A road show is a kind of information and advertising campaign. These events include a range of meetings and presentations in various cities. Institutional and private investors are usually invited to such meetings to ask the company's representatives questions and obtain more detailed information, assess the company's prospects and investment capabilities of new securities. All the events within a road show can be divided into two parts: the first part is the so-called one-to-one meetings with a representative of a certain investor; the second part envisages public events with many investors and journalists invited. A company's top management should be involved in this process. Key managers meet investors and answer their questions in detail. RBC's road show in Russia was held in Moscow. Press conferences, presentations and discussions were held, after which investors could form their own personal opinions. The company's top management held a series of road shows in Geneva, Zurich, London and Stockholm.

The particular thing about conducting an IPO in Russia is its legal basis and procedural matters that need a lot of amendments and adjustments. That is why these issues are worth being taking into consideration separately. As for the placement itself, it took approximately three months of strenuous work, including audit issuance of convertible bonds, and choosing the right moment for the placement itself. The economic situation and market infrastructure (legislation, the market itself, exchanges, and participants) in the country should be appropriate for releasing the company's shares. Everyone had been expecting this issue, and if we had made a mistake somewhere along the line, the next company to conduct an IPO would have waited a very long time to do so.

What prevents Russian companies from entering western stock exchanges more actively?

Obviously, an IPO on the New York Stock Exchange is far larger in terms of the volume of attracted funds, but few Russian companies have managed to reach Level 3 ADRs. In order to become a company placing its shares in New York, it is necessary to comply with the American exchange's exacting requirements and provide potential investors with full information on the company's activities. Certain criteria for a company's total income exist. The exchange will not register a company without prior approval of the US Securities and Exchange Commission. In order to receive approval from the US main regulating agency on the securities market, Russian companies have to simplify their ownership structure as much as possible and make all cash flows and information on the company's business in general as transparent as possible.

As concerns the IPO that RBC conducted two years ago, the story had its sequel. Last year the company made an additional issue of shares. Fifteen million shares were issued, which amounts to 15 percent of RBC's authorized capital. The attracted funds are expected to be spent on acquisitions in the media and IT sectors (70 percent), and implementation of new projects (30 percent).

Last December, the company's Board of Directors decided to float a depositary-receipt issue. We consider depositary receipts to be an effective instrument for RBC to enter the international financial market. As such, we can enable a wider range of institutional and private investors to have stakes in the company's share capital. The depositary-receipt program helps increase liquidity of the company's shares and raise the level of the international community's awareness of RBC's products, services and financial instruments. Following the results of the depositary-receipt issue, the company's Board of Directors will consider the possibility of listing RBC's shares on international exchanges. The Bank of New York was appointed as the depository within the framework of Level 1 ADR issuance program.

Are the experience and competence of Russian managers enough to conduct an IPO or is it more efficient to attract foreign consultants?

If we are talking about RBC's experience, we attracted consultants. A great amount of work was done with our lead manager, co-lead manager, lawyer and other consultants. The corporate governance issue was of primary importance for us. The management's activities should be clear to minority shareholders. We created new structural units: the investor-relations department and the corporate-governance department. A more significant measure taken in the corporate-policy sphere was the attraction of independent directors, four famous representatives of international business circles: Hans-Joerg Rudloff, CEO of Barclays Capital, member of the Novartis Board of Directors; Neil Osborn, Managing Director and Publisher of Euromoney group; Michael Hammond, Managing Director of City Capital Corporation, and Yuri Mostovoy, President of Interval and head of Barclays Capital. The independent directors institution is known to be very common and actively used in the West. Independent directors are a kind of status indicator for a company. As such, participation of independent directors with high international authority in the company's activities is a positive signal for investors. Evaluation of current trends, tracking remuneration policies, including personnel compensation, management efficiency, etc. fall within the ambit of independent directors who usually give highly professional advice. They have vast experience, and by using this correctly any company can improve its performance considerably.

The attraction of independent directors has helped us find new clients and strengthen our market positions. In order to meet western corporate-governance standards, we have modified the company's structure and introduced the so called Audit and Compliance Committee and the Compensations Committee.

What criteria should a company meet to reckon on a successful IPO?

Preparation of the main documents necessary for a public offering includes legal and financial audits, business evaluation, forming and registration of the issue prospectus, preparation of the company's information memorandum, development of the placement scheme and PR campaign.

Huge work needs to be done by a company before making an IPO. It is necessary to hold an international audit of financial statements, create a single holding structure and gain finance-raising experience. An issue of convertible bonds or sale of a non-controlling stake to a strategic investor can be examples of such experience. Investors should be sure that a company's financial statements adequately reflect its financial condition, and its management has an unblemished reputation of relations with creditors and business partners. The preparatory stage is the most difficult and may last for years, as transformation of a private business into a public company cannot be done painlessly and in an instant.

What are the prospects of the Russian stock market? Many people complain about its poor development.

Indeed, the Russian market is underdeveloped. There are many reasons for this but the most important thing is that it has low liquidity, and companies lack corporate-governance culture. Several Russian companies are ready to conduct an IPO and that is why a "boom" is said to be approaching. Nevertheless, IPO is still a rarity for most. Primarily oil, gas and energy-producing companies are represented on the Russian stock market. However, media and IT firms are developing fast in Russia and have an excellent future.

I think the Russian securities market is mature enough for companies to attract resources through IPOs. Yet all large placements will be held on international exchanges in the near future due to the higher liquidity of western markets and the cautious approach of Russian company management to the capabilities of the Russian market. Small companies, whose capitalization will not exceed $300m after placement, may reckon on quite successful offerings in Russia. Fewer costs and probably a higher evaluation of these companies' shares by market participants may affect their choice and prompt them to go for Russian exchanges.