(Bloomberg Opinion) -- The acquisition of Russia’s largest digital bank will accelerate Yandex’s progress toward superapp glory. With the $5.5 billion cash-and-stock deal as sketched out last week, what began as a homegrown Google would run the gamut from search, ride-hailing and music streaming to cards and deposits. It’s an accomplishment even Asia's pioneering apps-for-everything have struggled to achieve.
With added clout, though, come extra political and regulatory risks that are harder to quantify.
Being bigger isn’t always easier. Prominence, even dominance, has already come at the cost of compromise for the $22 billion U.S.-listed outfit. A Kremlin-sanctioned governance overhaul agreed last year allayed official concerns with the creation of a foundation to oversee sensitive issues including the transfer of intellectual property and users’ personal data.
The company also faces stiff local competition in the form of its erstwhile partner, state lender Sberbank PJSC, which has aggressively shift toward Big Tech by joining forces with Yandex rival Mail.ru and rebranding itself Sber.
Yandex’s rise has been remarkable. Founded in the 1990s, Russia’s technology powerhouse has expanded dramatically in the past few years. One of few search engines to dominate its home market ahead of Google, it combined with ride-hailing rival Uber Technologies Inc.’s local arm in 2017, taking a majority stake in their tie-up. It then added a string of other businesses and now stretches into everything from education to groceries — even if the search and portal segment still makes up the bulk of revenues.
The well-flagged move into finance with a tilt at challenger bank Tinkoff has been cheered as a logical step after Yandex’s split with Sberbank. Billionaire Arkady Volozh’s outfit wanted control, so it makes sense to use some of the cash on its balance sheet to buy a profitable lender, rather than build one, even a reasonably pricey one at roughly four times book value. Investors initially added some $2.6 billion to the combined value of the two sides’ shares — an optimistic view of future revenue benefits given a formal and detailed offer hasn’t been made yet.
On paper, the attraction is clear. Growth in online advertising and ride-hailing will cool. A deal with Tinkoff parent TCS Group Holding Plc plugs the fintech hole, while allowing Yandex to leverage the outfit’s consumer credit and small business focus to drive its e-commerce business, making the most of shopping habits transformed by a pandemic. Tinkoff has about 13% of the credit card market and 8% of the retail loan market in Russia, according to analysts at Citigroup Inc. In turn, the bank can cut marketing and other costs linked to bringing new customers on board — currently about a third of operating expenses.
In Asia, payments and financial services are key for would-be superapps like Southeast Asia’s Grab and Go-Jek, Tencent Holdings Ltd.’s WeChat and even Korean messenger app Kakao, which has had success with Kakao Bank. Still, by adding one of the world’s largest digital banks to its stable, Yandex arguably goes further than all of them, testing the limits of the superapp model.
Next, Yandex has to successfully manage the growing pains that come with that in Vladimir Putin’s Russia.
With its rejig last year, Volozh nimbly circumvented a law that would have limited foreign ownership, and Yandex’s public service during the pandemic will help. But concerns over sovereignty and internet data are not going away, especially given Russia’s increasingly prickly relations with the West. That may complicate any efforts to list its ride-hailing arm, part-owned by Uber. Cyber sovereignty will certainly limit expansion abroad if China’s tech experience abroad is anything to go by.
At home, Yandex is already walking a fine line between netizens and a heavy-handed Kremlin, with virtual protests held using its maps and navigation apps during lockdown as an example. The company later said it removes messages not related to road conditions. And that’s all before adding in the extra scrutiny that bank owners can expect.
There’s extra competition too as Chinese taxi giant Didi Chuxing motors into Russia. Even pesky competitors can be costly — ask Uber.
Finally, there’s the risk that a move-fast-and-add-businesses mantra turns Yandex into something more akin to Japan’s jumbled Rakuten, rather than Google or Tencent, with a conglomerate discount to match. Fintech makes sense, but does music streaming? Can Yandex create value developing shows for its streaming video platform? As importantly, can its management team stretch across its various early-stage businesses, a growing online shopping operation and more, while folding in a bank?
Yandex has plenty of ambition. It will need to prove that the financial benefits match.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.
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