Epam IPO to test investor take on Belarus

By bne IntelliNews January 27, 2012

Tim Gosling in Prague -

Although registered in the US, Epam Systems has the bulk of its operations in the Commonwealth of Independent States (CIS), and Belarus in particular. That makes its forthcoming IPO - for which it provided an initial pricing guide on January 23 - an interesting test of investors' attitude to Alexander Lukashenko's troubled country.

Epam has been flirting with a plan to list on the Nasdaq since June, when it first filed with the US Securities and Exchange Commission. And in January, it announced a pricing range of $16-18 per share, with final pricing expected to occur the week of February 6, according to Renaissance Capital.

The offer will constitute 7.4m new and existing shares - or approximately 17.5% of the stock - suggesting a company valuation of $778m and a target to raise $126m at the middle of the range. However, no more than 1.5m shares will be sold by Epam, so the company is likely to see around $27m; the remainder will go to unnamed shareholders who are putting 5.9m shares up for grabs.

The core shareholders are Belarusian founder and CEO Arkadiy Dobkin and the Russia Partners II investment fund. Whilst attempts to cash out rather than raise funds for company development helped scupper many of the IPOs out of the CIS that failed to make it out of the gate in 2011, that could well be balanced by investors' appetite for technology sector companies in the region - the hugely successful listing by Russia's Yandex being the prime example.

Joining the new wave of tech offers - it was the fifth company in the sector to set terms in January - Epam will be hoping to get a leg up from its role as the first to offer significant exposure to the software segment in CIS. Whilst it serves a host of US-based multinationals, it also works extensively in the former Soviet states, with 14% of 2010 revenues originating in the Russian market, according to VTB Capital. "The IPO step is a reasonable and natural one at our size," Karl Robb, who heads Epam's European business, tells bne.

Although the company says in its prospectus that part of the proceeds will go towards strategic acquisitions, Robb adds that, "the IPO is not related to any change of strategy," and that the company will continue to grow organically in its quest to "deliver high-end software engineering services to leading companies in the West and select emerging markets."

Carry on Belarus

No move to take on more expensive programmers in the West for Epam then, which, as bne reported in 2010, has continued to build its operations in Belarus even as it has bulked up in the "easier" markets next door in Russia and Ukraine.

The Minsk offices have maintained their size and momentum, now employing 2,000-plus people, compared with around 1,000 in Russia, 900 in Ukraine and 400 in Hungary. "As the business developed over time, we thought that the growth in Ukraine and Russia would lead to a significant relative decrease in the percentage of Epam's work being delivered to our Belarus office," Robb reported two years ago. "However, Belarus continues to perform very well and grow at a rate very disproportionate to the country's population, and it still accounts for just under half our staff and remains the largest centre we have in Central and Eastern Europe."

The picture hasn't changed, he says, despite events since December 2010 surrounding the rigged election, which have seen President Alexander Lukashenko lead the country into international isolation. A chronic trade deficit also sparked a currency crisis last year, with ordinary Belarusians seeing the value of their few assets crumble and the cost of imported goods skyrocket.

Robb, however, claims Epam is entirely unaffected. "The economic events in Belarus - or for example Hungary where we also have operations - don't affect us. We do software development. We pay people good salaries, on time. We're cash rich. We're not reliant on any raw materials. There's no government involvement in any of the countries in which we operate. We have a simple business model - it's all about execution."

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