IPO Market in 2010: Myths and Stereotypes

Yevgeny Samoilov
Managing Partner
Baker Tilly Russaudit

Any forecast made with respect to how financial markets will develop in the coming year is a thankless task. To tell the truth, no one can be sure about the future prospects even for the developed economies; things are far more complicated in Russia. At the same time, there is some logic in the way the situation is evolving.

First of all, the coming year will not be critical from the point of view of coping with the current crisis. State infusions of cash to the economy made it possible to “smooth out” the crisis in its acute stage. Businesses had almost a year to analyze the economic situation, while the banks adjusted their risk management models. This means that the economic community has a clearer view on who will be able to survive on their own, who will get help from the state no matter what, and who will have to go bankrupt. Thus, the crisis has gradually become another “routine”; it is no longer something extraordinary, and we are now used to living in the new economic reality. At the same time, the new reality is much harder on all players acting in all markets: loss of purchasing power and lack of investment demand do not give us grounds to expect a fast return to pre-crisis turnover in the near future. Everyone is adjusting to the changed market size and the new level of competition. Most likely, in the coming year, companies will start implementing the new strategies developed here and now.

Second, the current composition of most Russian companies’ liabilities is far from being adequate for the purposes of the financial community. Despite the efforts taken to restructure debts, achieve more long-term liabilities and reduce the total debt load, companies urgently require equity infusion. The need for shareholders’ cash is even more pronounced for those that perceive the crisis as an opportunity that affords development and intend to pay the best price for those companies whose financial model currently does not allow for development, and that are forced to continuously solve the issues of refinancing payable accounts. Thus, there is a growing demand for equity that would meet the adjusted requirements made by the current financial market with respect to risk and liquidity. Many financial institutions certainly incurred significant losses during the past year and a half. However, their operations have not stopped, and all businesses are interested in making a profit. All financial market indicators show availability of cash in the financial system. This means that demand for equity capital can be met with the cash offered by the investors.

Third, the situation described above will be common only in the segment of large companies, with long experience in the public capital market, that have proven the efficiency of their business model this year or have received state support. “Unique” companies with a small or average cap will certainly also be able to launch IPO or employ other means of financing to implement their strategies. However, that concerns individual companies, whose success will be ensured by charismatic founders and executive teams. True business leaders are rare. Besides, the crisis demonstrated that Russia does not have many professional investment banking teams that might be interested in dealing with small or average cap companies. Thus, the market will regain a certain balance characteristic for the first half of this decade. It will not be a crisis, or a boom — the coming year will see routine work, which will include both successful IPOs and stories of bankruptcies and takeovers.

An observant reader will certainly come back to the heading of the article and inquire about myths and stereotypes in the text. It falls to every reader to give their own answers about what is what, and to compare this to results that will become known in December of 2010. I wish everyone good luck in the coming year.