As the founder of “1C” built a business with revenue of $1 billion (part 3)
Anatoly Karachinsky, head of IBS Group, is more careful in his assessments. He believes that although 1C has done an amazing job showing how a local developer can create a standard accounting program, the merits of Nuraliev’s company in the ERP market should not be exaggerated. “1C” has won the accounting market due to a good distribution system and a large number of partners, which they gave the opportunity to earn on consulting and implementation of programs, — he says. — But in the market of complex ERP systems, SAP and Oracle are still struggling, and 1C will have to answer the challenge — to rise from the accounting system, which has become the standard for small businesses, to the segment of large ERP.”
Time schemes, working since the nineties, rapidly ended. It firms such as SITRONICS and Armada have already entered the IPO. We were going to become public Kaspersky Labs and Verysell. “At the beginning of 2008, all [IT-firms] had such a swing — to enter the IPO, to build giants, — Nuraliyev recalls. — And that same, all will giants, and we midget?”The Director of “1C” continues the story with a phrase from the movie “Seven old men and one girl”: “Women already play volleyball!”.
The company had to expand and buy up other market participants. Nuraliyev says that mergers and acquisitions “1C” carried out “on the and never on it the credits didn’t ask”. “Our business has always been quite profitable,” he says, but he does not name any revenue or profit. According to Forbes estimates, in 2011 his company earned 23.7 billion rubles (against 18.5 billion rubles in 2010), which is confirmed by a source of Forbes close to the company.
The first major purchase Nuraliev made in 1996. He decided then to turn one of the partner companies, as he jokingly says, into a “demonstration collective farm”, offering Dmitry Kazachkov, the founder of the partner company “Rarus”, to become a joint venture with the distribution of shares “50 to 50” — so that there was someone to lead partners, to show the success story. Kazachkov agreed from pure pragmatism: the share of “1C” in the company is a guarantee for business.
The same scheme Nuraliev applied 10 years later, in a completely different segment of the market. In the mid-2000s in Russia began a boom in online Commerce, many retailers began to build online stores. In the spring of 2007, 1C agreed to establish a joint venture with equal shares with the developer of systems for web-trading — the company Bitrix. According to w3techs analysts, it had 1% of the world market in 2013. In Russia, her client had a network “Eldorado” through the site, which in 2007 had been $60 million in revenue.
Sergey Ryzhikov, CEO of 1C-Bitrix, recalls that their company has always “reached out to the same companies that 1C works with, and that online trading needs not only a website, but software integration with the warehouse and accounting.” In addition, the “Bitrix” was like an affiliate network of approximately 1,500 firms and consultants. They soon met Nuralieva and agreed on joint business “50% to 50%”. The shareholders of Bitrix agreed, “because they believed Boris.” “He does not Jules, speaks frankly about his goals and causes counter-frankness,” says Ryzhikov.
Expanding its presence in the market, Nuraliev was forced to abandon the usual scheme of acquisition only at their own expense. Management “1C” began to listen to the proposals and then appeared on the threshold of investors. The person familiar with the events then in the company assures that it was necessary to look for money in the market not from good life. During the crisis, many partners of “1C” has stopped payments. Boris Nuraliev argues that, for example, in 2008, the company’s revenue increased by only 8%, although the year before it almost doubled. He believes that “1C” well passed the peak of the crisis in 2009 — revenue fell by 13%, despite the fact that, according to IDC, the market as a whole fell by more than 40%. Nuraliev explains this by maintaining demand for business programs.
In October 2008, when the crisis was already raging, Elena Ivashentseva, a senior partner of Baring Vostok Capital Partners (one of the first investors in Yandex, the owner of the stake in Yandex), called Nuraliev with a proposal to meet Ozon.ru). She learned that 1C was interested in attracting investments. By the time the Fund Private Equity Fund IV raised $ 1.05 billion Ivashentseva says that the Fund Private Equity Fund IV interested primarily the same affiliate network “1C”. Nuraliev, however, did not hurry (“do not agree to the first sentence!”): “1C” then hired “Renaissance Capital”, which, as told by investment bankers, negotiated also with UFG Asset Management, and Delta Private Equity Partners. However, after consultations, including with the owner of Yandex Arkady Volozh, Nuraliyev decided to make a deal with Baring Vostok.
In October 2011, Private Equity Fund IV received 9% of the specially created Cyprus offshore “1C Ltd.”The rest of the shares it owns ZAO “1C”, which was consolidated assets of the company.
The parties do not disclose the amount of the transaction, but it can be calculated. Revenue “1C” in 2011 was, according to Forbes, $0.8 billion Public company SAP in relation to revenue to capitalization (p/s)was trading then with a multiplier of 3.4. Ksenia harutyunova from RMG Securities believes that a 25% discount is applicable in the Russian IT market compared to the developed markets. Taking into account the discounts ,1C could cost from $2 billion to $2.5 billion, and the Baring package — $180-220 million. However, one of the experts of the IT market considers these estimates too optimistic. He admits that as a result of a sharp drop in financial indicators “1C” in 2008-2009, the value of the company could decline and in fact Baring paid for the package “about $40 million”, estimating the entire “1C” no more than $400 million Elena Ivashentseva says that this is “not true”, but the amount is not called. Nor does Nuraliyev comment on these data.
What does 1C spend the funds received from the transaction with Baring Vostok? He accelerated the creation of joint ventures with partner companies. If in 2001 “1C” had about ten joint and “subsidiary” businesses, in 2011 their number exceeded hundred. But that’s not all.
Nuraliyev buys assets that will allow investors to perceive “1C” as a diversified business in the field of high-tech, and not just a developer of accounting programs and a dealer network”, — says the top Manager of one of the international software companies. As a rule, the market is pricing these companies is more expensive, he recalls. And Nuraliyev does not exclude the exit to the IPO and admits that one of the auditors of the “big four”, which he does not call, conducts an audit of “1C”.
What does Nuraliyev buy? The company is actively expanding the rapidly growing direction of computer games. By the end of 2010-ies “1C” held a series of mergers and acquisitions, buying developer “Buka”, a share in Avalon Style Entertainment, invested in the creation of the company Nival Network and acquired the publisher of games for consoles “Softklab”. Another area of investment is the purchase of “cloud” companies and the development of this technology. This model is called SaaS (Software as a Service — “Software as a service”): the technology allows companies to keep programs and databases not on their servers, but at the service provider and use them on the Internet. In the summer of 2011, “1C” has embedded cloud capabilities in its program of “1C:Enterprise 8.2”, and in may 2012 on the website 1СFresh become available “cloud” program “1C: manufacturing enterprise Management”, “1C: Accounting 8” etc. Pioneers the use of cloud technologies among Russian companies began in 2008, a small company “Moysklad” and “Megaplan”. They are something and bought in 2012, “1C”.
Experts call SaaS “the killer of intermediaries”, but contrary to all the rules Nuraliev still gives partners the setting of cloud software and leaves them 50% of the revenue. Now not only for the “box”, and for the service. What is logic? Those who know Nuraliyev well, just do not advise to look for her. “There is a human logic: here is the problem — here is the solution, but the logic of Nuraliev’s solutions, which led to effective results, I could never understand,” says Sergey Belousov, founder of Parallels software company operating around the world. “Boris is a representative of a very advanced, but not humanoid race,” he smiles.