DST Continues its Surge with Potential AOL Deal

I just read in the Wall Street Journal that Yuri Milner, the CEO of Digital Sky Technologies (DST), is in talks with AOL to buy its instant messaging service (ICQ), which has 12.6 million users in Germany and 8.4 million users in Russia.  The deal with AOL could land somewhere between $200-$300 million, which could be the next blockbuster tech deal to come after DST’s unprecedented investment in Facebook, which was also rumored to be around $200 million for 2% of the company.

I think that Milner and DST are a fascinating business story, and it’s interesting to watch this one enterprising and innovative Russian businessman quietly become a global leader on the frontiers of a new industry.  Milner has a magic touch in making money out of these different technologies:  his company already boasts Russia’s biggest email provider (mail.ru), a successful job hunting platform, and a virtual clone of Facebook known as Vkontakte.ru, which unlike its predecessor, actually makes a profit.  Given Putin and Medvedev’s frequent harping on about how the state and the state alone must lead Russia out of its reliance on raw materials exports and force the diversification of the economy, Milner’s success story is an example of a counter-narrative.  When the government can finally get out of their way, Russian people are capable of competing on the the world’s stage.

But there are also some concerns behind DST’s surge to become Russia’s best internet company.

In an interview with the Financial Timesa few months ago, Milner offered the theory that Russia’s internetusage was set to rise dramatically because of its cold climate, extremedistances, and the social nature of its people.  The same article alsopoints out that DST benefits from an unofficial policy of protectionismtoward the internet, and naturally there are some political concernsthat the Kremlin may get a little heavy-handed in its internet oversight. 

If I were Milner, I would worry about becoming too successful … a unified holding of several of Russia’s most popular email and social media platforms with important assets abroad might prove to be just too irresistible for someone in the government to expropriate.  That is certainly not impossible after seeing the daylight thefts of both Yukos, Russneft, Hermitage, and so many others.  I don’t think anybody has immunity these days.

Another potentially troubling dark cloud to hangover the DST surge is the participation of investor Alisher Usmanov,who is reported to have upped his stake in the technology group just afew days ago to 35%.  There’s a bit of a history there.

But all in all, Milner and DST are a refreshing change of pace of the kind of business and the kind of businessmen we are used to seeing as representatives of Russia abroad.  In an ideal country, his would be a common, not exceptional, story.