How to evaluate an IPO, according to Houston researchers

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In emerging markets, pricing — not reputation — drives the partnership between underwriter and IPO. Photo via business.rice.edu

Many investors assume they can judge the strength of an IPO based on the reputation of the underwriter supporting it.

However, a recent study by Rice Business professors Anthea Zhang and Haiyang Li, along with Jin Chen (Nottingham University) and Jing Jin (University of International Business and Economics), proves this is only sometimes true — depending on how mature the stock exchange is.

Getting your company listed on the stock market is a big step. It opens new opportunities to raise money and grow the business. But it also means facing increased regulations, reporting requirements and public scrutiny.

To successfully launch an initial public offering (IPO), most companies hire “underwriters” — financial services firms — to guide them through the complex process. Because underwriters have expertise in valuations, filing paperwork and promoting to investors, they play a crucial role in ushering companies onto the market.

In well-established markets like the New York Stock Exchange (NYSE), an underwriter’s reputation carries immense weight with investors. Top-tier banks like Goldman Sachs have built their reputations by rigorously vetting and partnering with only the most promising companies. When Goldman Sachs takes on the role of underwriter, it sends a strong signal to potential investors that the IPO has met stringent standards. After all, a firm of Goldman’s caliber would not risk tarnishing its hard-earned reputation by associating with subpar companies.

Conversely, IPO firms recognize the value of having a prestigious underwriter. Such an association lends credibility and prestige, enhancing the company’s appeal. In a mature market environment, the underwriter’s reputation correlates to the IPO’s potential, benefiting both the investors who seek opportunities and the companies wanting to make a strong public debut.

However, assumptions about an underwriter’s reputation only hold true if the stock exchange is mature. In emerging or less developed markets, the reputation of an underwriter has no bearing on the quality or potential of the IPO it pairs with.

In an emerging market, the study finds, investors should pay attention to how much the underwriter charges a given IPO for their services. The higher the fee, the riskier it would be to invest in the IPO firm.

To arrive at their findings, the researchers leveraged a unique opportunity in China’s ChiNext Exchange. When ChiNext opened in 2009, regulations were low. Banks faced little consequence for underwriting a substandard IPO. Numerous IPOs on ChiNext were discovered to have engaged in accounting malpractice and inaccurate reporting, resulting in financial losses for investors and eroding confidence in the capital markets. So, for 18 months during 2012-2013, ChiNext closed. When it reopened, exchange reforms were stricter. And suddenly, underwriter reputation became a more reliable marker of IPO quality.

“Our research shows how priorities evolve as markets mature,” Zhang says. “In a new or developing exchange without established regulations, underwriter fees paid by IPO firms dictate the underwriter-company partnership. But as markets reform and mature, reputation and quality become the driving factors.”

The study makes a critical intervention in the understanding of market mechanisms. The findings matter for companies, investors and regulators across societies, highlighting how incentives shift, markets evolve and economic systems work.

The research opens the door to other areas of inquiry. For example, future studies could track relationships between underwriters and companies to reveal the long-term impacts of reputation, fees and rule changes. Research along these lines could help identify best practices benefiting all market participants.

“In the future, researchers could explore how cultural norms, regulations and investor behaviors influence IPO success,” says Li. “Long-term studies on specific underwriter-firm pairs could reveal insights into investor confidence and market stability. Understanding these dynamics can benefit companies, investors and policymakers alike.”

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This article originally ran on Rice Business Wisdom and was based on research from Yan “Anthea” Zhang, the Fayez Sarofim Vanguard Professor of Management – Strategic Management at Rice Business, and Haiyang Li, the H. Joe Nelson III Professor of Management – Strategic Management at Rice Business.

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A patent is an asset — one with a price associated with it when it comes to procuring a loan for your business. Photo via Getty Images

Rice research: What innovations can be used to borrow against?

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For companies and leaders, patents represent important assets. They’re a marker of innovation and tech development. But patents do so much more than protect intellectual property. Firms increasingly deploy them as collateral to secure loans. Between 1995 and 2013, the number of patents pledged as loan collateral increased from about 10,000 to nearly 50,000. Forty percent of U.S. patenting firms have used patents as collateral.

However, patents are intangible assets, and their liquidity and liquidation value are difficult to assess. To evaluate an individual patent, lenders must consider the invention space to which the patent belongs. A patent’s linkage to prior inventions can provide important information for lenders, as the linkage affects the extent to which the patent under consideration may be redeployed and potentially purchased by other firms in the case of loan default.

Rice Business professor Yan Anthea Zhang examined more closely how this market operates and how both lenders and borrowers can make more informed decisions on which patents make appealing collateral. In their paper, “Which patents to use as loan collateral? The role of newness of patents' external technology linkage,” Zhang, who specializes in strategic management, and her co-authors studied the data on 107,180 U.S. semiconductor patents owned by 436 U.S. firms. The team focused on semiconductor patents because the semiconductor industry involves intensive innovation, which leads to many patent applications and grants. The market for semiconductor patents is an active and well-functioning market, given specialization in different stages of the innovation process and the growing technological market. Information on whether a patent was used as loan collateral came from the USPTO Patent Assignments Database.

Zhang and her colleagues argue that lenders prefer patents linked to prior inventions that are relatively new because these patents are riding on recent technology waves and are less likely to become obsolete. As a result, such patents are likely to remain deployable to other firms in the future. However, patents that are based upon too new prior inventions might not prove to be commercially viable and carry higher risk for lenders.

As a result of this research, Zhang and her colleagues found an inverted U-shape relationship to demonstrate the likelihood that a patent will be used as loan collateral. On one end, patents based upon the newest prior inventions, on the other, patents based upon mature prior inventions. The curve of the U-shape represents the sweet spot for patent collateral—the patents’ technological base is new enough to be relevant and competitive with other firms in its invention space, but not so new that it has yet to prove market success.

Zhang’s team also found that the impact of external linkage also varies depending on borrower attributes, especially the borrowers’ expertise in the invention space. If a borrower is a technological leader in the invention space, the market tends to give the borrower credit, and as a result, even if its patents are based upon very new prior inventions, its patents are still likely to be accepted as collateral.

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This article originally ran on Rice Business Wisdom and was based on research from Yan Anthea Zhang, the Fayez Sarofim Vanguard Professor of Management at Rice Business.

Expanding into foreign markets is tempting, but strategic fit can determine success or disaster. Photo via Getty Images

To expand or not to expand? Houston researcher weighs in on global growth

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You built your business from the ground up, patiently finding techniques and products that work, carefully crafting solid bonds with your clients. Then one day a new project, opportunity or simple request poses a question: Is it time to branch out overseas?

Of the welter of questions to consider, the first and most important involves location: not just the physical location of the prospective expansion site, but the cultural differences between a firm's home country and its new destination. Secondly, key company traits need to be considered in choosing the investment locations. Is your firm large or small? Young or old? Finally, of pivotal importance to companies outside the United States: Is your company privately held or state-owned?

In a recent paper, Rice Business professor Yan Anthea Zhang looked closely at these three variables with Yu Li of the University of International Business and Economics Business School in Beijing, China and Wei Shi of the Miami Business School at the University of Miami. What, the researchers wanted to know, was the relation of these three features and firms' location choices for their overseas investments?

To find out, Zhang and her colleagues analyzed 7,491 Chinese firms that had recently ventured into foreign markets with 9,558 overseas subsidiaries. Because China now has become the world's leading source of foreign direct investments, the sample promised to be instructive. Thanks to the large sample size, researchers could test hypotheses relating to firm size, age, ownership and the impact of geographical and cultural distance on their location choices.

After studying the elements of geographic distance and cultural distance, Zhang and her colleagues uncovered a paradox. Companies that had an advantage in tackling one dimension of distance were actually disadvantaged — because of the same characteristic — in another dimension.

How, exactly, did this paradox work? Larger firms, with access to more resources, can "experiment with new strategies, new products, and new markets," the researchers wrote. This large size makes geographic distance less of a concern, but it comes with a ponderous burden of its own. Company culture is directly influenced by the country of origin, Zhang wrote. Transferring that culture into a completely different environment can cause the kind of shock that could lead to failure, even with financial and physical resources to ease the geographical distance. Conversely, smaller firms may be more nimble and able to adapt to needed cultural changes — but lack the resources to make true inroads in a foreign market.

A similar paradox exists for older and younger firms, Zhang wrote. A younger firm is more likely to adapt to a culturally distant country than an older firm might, even if that youth means that geographical distance is a greater logistical challenge.

State-owned firms face a similar paradox, one that comes down to the balance of resources against cultural flexibility. A company with state-generated resources may be better equipped to move a caravan people, machinery and materials to a distant new location. However, state-owned companies often typically lack the internal cultural flexibility to handle expansion to a different environment.

What does this mean for the average manager? Simply that going global demands meticulous weighing of factors. Does your firm have the practical resources to expand overseas? Does your staff have the personal flexibility and willingness to meld company culture with that of a different milieu? It's a truism that major overseas expansions require money and heavy lifting. Less obviously, managers of successful companies must thread a very fine needle: ensuring they have the material resources to get their business overseas physically, while confirming that company culture is light enough on its feet to thrive in day-to-day life in a new place.

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This article originally ran on Rice Business Wisdom and is based on research from Yan Anthea Zhang, a professor and the Fayez Sarofim Vanguard Chair of Strategy in the Jones Graduate School of Business at Rice University.

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Eli Lilly breaks ground on $6.5B pharmaceutical factory in Houston

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Leading pharmaceutical company Eli Lilly broke ground today, Sept. 21, on its $6.5 billion manufacturing site at Houston's Generation Park.

The 236-acre, state-of-the art factory is expected to come online in 2030 and will manufacture Foundayo, the company's first synthetic oral GLP-1 medication, as well as other advanced therapeutics.

"We are thrilled to break ground on our latest ‘medicines made in America’ site in the great state of Texas," David Ricks, Lilly chair and CEO, said in a prepared statement. "This $6.5 billion investment will help change the game for tens of millions of people suffering from overweight, obesity and its consequences like diabetes. We will make and ship Lilly’s latest products from Texas to people here at home and around the world.”

Houston was up against more than 300 locations in the U.S. for the factory, as part of Lilly’s $50 billion investment in domestic medicine production that has launched 10 manufacturing sites since 2020. Lilly first announced Houston had been selected for the site last September.

Photo via gov.texas.gov

As Abbott mentioned, the site is expected to create hundreds of jobs, and will hire engineers, scientists, operations personnel and lab technicians once up and running. It will create 4,000 construction jobs while being built.

In an effort to support workforce development, Lilly also announced a $12.5 million commitment to Houston's San Jacinto College in addition to a $2.5 million charitable donation to the San Jacinto College Foundation. The funding will go toward hands-on training, equipment and facilities to support future technicians, operators, maintenance professionals, and other manufacturing talent, according to Lilly. The charitable donation will fund scholarships for students.

"This relationship will build a strong, sustainable talent pipeline for Lilly while creating meaningful, high-demand career opportunities across our region,” Brenda Hellyer, chancellor of San Jacinto College, said in the release.

"When you invest in a place like Houston, you invest in its people first," Edgardo Hernandez, executive vice president and president of Lilly Manufacturing Operations, added. "This facility will run on the talent of this community, powered by our relationship with San Jacinto College. We're hiring across the greater Houston area to help residents build careers close to home."

Rendering courtesy Eli Lilly

Lilly previously said it chose Generation Park, a 4,300-acre, master-planned commercial district near Lake Houston, because of factors such as financial incentives, access to utilities and transportation and the region’s business-friendly environment. Generation Park is home to campuses for San Jacinto College and Lone Star College.

Since Lilly first announced plans for the site, another fellow pharma giant has made plans to move into Generation Park. Bristol Myers Squibb Co. announced last month that it would build a $2.3 billion factory in the district. The site is expected to manufacture small molecule, biologic and antibody-drug conjugates and will also come online around 2030. Read more here.

UH Health names leader of new digital health institute

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Recently launched UH Health has named the first-ever executive director of its new Institute for Digital Healthcare Transformation at the University of Houston.

Beto López has been tapped to lead the new initiative that aims to help develop and commercialize health care technologies centered around university research.

Launched in August, the Institute for Digital Healthcare Transformation leans on experts from UH’s engineering, medicine, business, law and other departments and will connect with industry partners. It will initially focus on mobile health applications, sensors, wearables and artificial intelligence, according to UH.

“Most digital health initiatives and commercialization efforts start with the technology and hope adoption follows. But the translation gap isn't a science problem — it’s a scaffolding problem between researchers, the community and the market,” López said in a news release. “I've spent the past 10 years building that scaffolding in places that weren’t wired for it, and I'm looking forward to building it here at UH to help ensure new health care technologies reach the people and communities that can benefit from them most.”

López previously spent 10 years at San Francisco-based innovation consultancy company IDEO, where he led over 100 projects for Fortune 500 companies and public agencies. He co-founded and served as managing director of the Design Institute for Health at UT Austin’s Dell Medical School; and also co-founded a social venture studio/venture capital fund focused on health care innovation. He worked alongside Houston’s Legacy Community Health during the COVID-19 pandemic.

“Beto understands that breakthrough technology alone doesn't transform health care — it has to be designed around the needs of patients, providers and communities and have a clear path into practice,” Jonathan McCullers, vice president for health affairs at UH, added in the news release. “His experience spanning academic health care and venture capital equips him to bring together researchers, health care organizations, entrepreneurs and investors. This makes him uniquely suited to lead this institute and help turn the university's innovation into solutions that improve people's lives.”

The University of Houston launched UH Health, its new cross-disciplinary academic venture, in July. It aims to bring together the university's health-related education, research and community impact under one umbrella.

ExxonMobil gets approval for $5B Texas Gulf Coast carbon capture project

CCS Expansion

Spring-based ExxonMobil has won approval from the Texas Railroad Commission for a $5 billion carbon capture and storage project in East Texas.

Dominic Genetti, senior vice president of CCS at ExxonMobil, told The Financial Times, which broke the news, that the Railroad Commission’s action is a “major milestone” that lets the company keep expanding along the Gulf Coast. In a 2-1 vote, commissioners authorized a carbon sequestration permit for the project.

“The Railroad Commission clearly recognizes the important role carbon capture and storage can play in meeting growing global demand for lower-carbon products while supporting new jobs and economic growth,” Genetti said.

The U.S. Environmental Protection Agency (EPA) approved ExxonMobil’s Rose CCS project last year.

The project will enable the company to inject about 53 metric tons of industrial customers’ carbon emissions into three underground wells it drilled in the Beaumont-Port Arthur area. Over a 13-year period, ExxonMobil plans to inject about 4 million metric tons per year into the Fleming and Upper Frio rock formations, according to Carbon Herald.

ExxonMobil says it owns the world’s first and largest CCS system, comprising 1,300 miles of CO2 pipeline and secure storage sites. Seventy percent of the pipelines are along the Gulf Coast.

The company ramped up its CCS business in 2023 with the $4.9 billion purchase of Denbury, which owned about 1,000 miles of CO2 pipelines.

“Our expertise, combined with Denbury’s talent and CO2 pipeline network, expands our low-carbon leadership and best positions us to meet the decarbonization needs of industrial customers while also reducing emissions in our own operations,” ExxonMobil Chairman and CEO Darren Woods said when the deal closed.

In January, Genetti wrote in a post on ExxonMobil’s website that the company is committed to CCS “for the long haul.”

“CCS is not new technology, but it’s flown relatively under the radar compared with the attention that production of hydrocarbons commands,” he wrote. “Now, as the world becomes more aware of the need to reduce emissions, CCS finally has a brighter spotlight and a broader runway to scale up.”

The company also announced this week that it has begun CCS operations at a direct reduced iron facility in Convent, Louisiana. The project will capture, transport and store up to 800,000 metric tons of CO2 per year, according to the company.

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This article first appeared on EnergyCapitalHTX.com.

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