Koch Industries, Inc. History

Address:

P.O. Box 2256
Wichita, Kansas 67201
U.S.A.

Telephone: (316) 828-5500
Fax: (316) 828-5500

Website: www.kochind.com

Private Company
Incorporated: 1942 as Rock Island Oil & Refining Company
Employees: 13,000
Sales: $30 billion (1996 est.)
SICs: 1311 Crude Petroleum & Natural Gas; 2899 Chemicals & Chemical Preparations, Not Elsewhere Classified; 2911 Petroleum Refining; 3089 Plastic Products, Not Elsewhere Classified; 3443 Fabricated Plate Work (Boiler Shops); 3599 Industrial & Commercial Machinery & Equipment, Not Elsewhere Classified; 4612 Crude Petroleum Pipe Lines; 4613 Refined Petroleum Pipe Lines; 5171 Petroleum Bulk Stations & Terminals

Company Perspectives:

Koch Industries is the second largest privately held corporation in the U.S. with more than 13,000 employees worldwide. Koch embraces a market-based philosophy to grow its businesses worldwide in refined products, chemicals, gas liquids, crude oil services, mineral services, energy services, capital services, road and construction materials, chemical technology, and agriculture. Our common vision is one of discovery. Charles Koch, chairman and chief executive officer, speaks of "a company where employees are motivated to look for and seize opportunities, a culture where our people can take initiative, challenge the past and apply their knowledge." Together, we're working to become a "society of explorers," where everyone practices humility, intellectual honesty, teamwork, and an acceptance of risk in support of better satisfying customers' needs.

Company History:

Koch Industries, Inc., a diversified petrochemical company, is the second-largest privately held firm in the United States, trailing only Cargill. The bulk of Koch's revenue is derived from the transport of oil by pipeline, truck, and ship, but it also drills, refines, markets, and trades oil and gas products in the United States and around the world. In addition, the firm has substantial coal, chemical, and real estate interests, and raises many thousand head of cattle on ranches in Kansas, Montana, and Texas. About 80 percent of its multibillion-dollar assortment of assets is owned by two of the four sons of Fred C. Koch, founder of the company, while two other sons were bought out in 1983 after a bitter and continuing struggle among the brothers for money, corporate control, and pride. Traditionally a very secretive company, Koch has seen various lawsuits and investigations in the 1980s and 1990s pull away some of its veil.

Founder Battled Big Oil and Made Initial Fortune in the Soviet Union

The son of a Texas newspaperman, Fred C. Koch earned an engineering degree at Massachusetts Institute of Technology in the 1920s. Koch invented a new and more efficient method for the thermal cracking of crude oil, the process by which oil is heated to effect a recombination of molecules yielding higher proportions of usable compounds, especially gasoline. With the dramatic growth in the use of the automobile in the first quarter of the 20th century, refiners were constantly trying to improve their cracking technology, and Fred Koch's innovation was apparently good enough to draw upon him the wrath of the major oil companies. Protective of their tight control over every aspect of the oil business, the majors began a series of lawsuits against Fred Koch that would last 20 years and involve over 40 separate cases, eventually being resolved in 1952 when Koch won a $1.5 million settlement. Then as now, the international oil business was in the hands of only a few firms, which meant that Fred Koch would encounter the same obstacles wherever oil was bought and sold.

In the late 1920s there was at least one country in the world where oil was not bought and sold, in the usual sense--the Soviet Union. The Soviets had been trying to take advantage of their immense oil reserves since gaining power in 1917, and under Joseph Stalin the drive to industrial efficiency was pursued with ruthless speed but without the benefit of Western technology. Fred Koch offered to build oil refineries in the Soviet Union that would be more efficient than those in the West. The young engineer's ideas were welcomed, and he was awarded a large contract to coincide with Stalin's first five-year plan, beginning in 1929. The contract called for construction of 15 refineries for an initial fee of $5 million, from which Koch and his partner, L. E. Winkler, are said to have netted a $500,000 profit. Koch's work in the Soviet Union necessitated sojourns in that country, offering the Texas farmboy an intimate look at the Soviet system while providing the cash he would later need in building his U.S. empire.

By the late 1940s Koch had achieved a truce with his adversaries in the oil industry and begun assembling bits and pieces of business in the Midwestern United States. Having been burned severely by the majors the first time around, Koch carefully avoided head-to-head competition with the industry leaders, instead developing a knack for discovering unexploited niches and an ability to turn a profit on even the smallest orders. In an age of massive, worldwide integration in the oil industry, Koch concentrated on service businesses too small to interest the majors and too obscure to attract much competition. While the majors largely controlled oil at the wellhead, they still required an ever-growing network of pipelines and trucks to convey the oil to the refinery, thence to the mass of distributors, wholesalers, and retailers involved in its final sale. As the country's dependence on oil grew, so too did the need for more complete systems of oil distribution, and Fred Koch amassed a fortune in providing the equipment and expertise to meet that need.

Koch's main vehicle in the oil business was a company called Rock Island Oil & Refining Company, based in Wichita, Kansas. While busy picking up bargains in businesses from trucks to coal mines, Koch fiercely guarded the privacy of his company, ensuring that it would not only remain under family control but also stay far from the prying eyes of government and the media alike. It is reported that a number of Koch's good friends in the Soviet oil industry were liquidated during Stalin's purges of the 1930s, an experience that only confirmed his belief, perhaps originally instilled by the battering he took at the hands of big oil, that business is best conducted silently. Rock Island Oil & Refining had no public relations department, having no relations with the public, and the Koch family went out of its way to avoid doing business with the government. Fred Koch's particular aversion to Soviet communism took a more direct form in 1958 when he helped found the John Birch Society, an ultraconservative group soon to become notorious for its warnings about the threat of communists to U.S. society. Charles Koch, the second of Fred Koch's four sons, would later pour millions of dollars into the Libertarian Party, a proponent of minimal governmental interference in the affairs of business.

Charles Koch Diversified Company's Operations

Like his father, Charles Koch earned an engineering degree at Massachusetts Institute of Technology, and then spent several years working for a business consulting firm before joining Rock Island Oil in 1961. Frederick Koch, Fred Koch's eldest son, did not participate in the oil business. Charles Koch took over leadership of Koch Engineering, one of the family's many concerns, and helped make it into the world's largest manufacturer of mass transfer equipment for the chemical industry. By the time of Fred Koch's death in 1967, sales at Rock Island and the various Koch subsidiaries had reached about $400 million, presenting the 32-year-old Charles Koch with a weighty responsibility. Charles Koch was not only a capable leader in his own right but also enjoyed the continued presence of his father's top aide, Sterling Varner. Varner had already won a reputation as a shrewd buyer of what he referred to as "junk," the bankrupt or unwanted oil and gas properties that Rock Island habitually turned into profitable acquisitions. Under the ambitious administration of Charles Koch, Varner kept a low profile but was widely credited with supplying the savvy behind the company's rapid expansion.

Charles Koch brought a young man's energy to the company. From the new Wichita corporate headquarters of the renamed Koch Industries, Inc., Charles Koch oversaw his company's diversification into a number of new areas, including petrochemicals, oil trading services, and ownership of a refinery in St. Paul, Minnesota. In 1969 Koch Industries merged with Atlas Petroleum Limited of the Bahamas, a distributor of crude oil and petroleum products with about $100 million a year in sales. The next few years saw the arrival at Koch of Charles's twin younger brothers, William and David, both of whom took executive positions with the company. While sharing their father's basic preference for privacy, the brothers gradually let it be known that Koch Industries was a far larger concern than imagined. In 1974 the family admitted to owning some 10,000 miles of pipeline in the Midwestern United States and Canada, hundreds of tank trucks, barges, deepwater terminals, and storage facilities of every description. Through this system Koch distributed about 800,000 barrels of oil each day, some of it refined at its St. Paul refinery, some sold via the company's several hundred gas stations, but most of it transported to and from the major oil companies. Koch also participated in the rush to buy supertankers, owning a handful of the huge ships to complement its oil trading offices in eight countries. Finally, the company had begun its own program of oil exploration and drilling, and also owned around 60,000 head of cattle. Sales reached more than $2 billion in 1974, the first full year of post-OPEC price inflation in the oil business.

The OPEC price hikes of the early 1970s effectively killed the supertanker business, however, forcing Koch to sell all but one of its ships at salvage prices. Nevertheless, the dramatic run-up in oil prices during the 1970s helped Koch increase its revenue sevenfold in a matter of years. By 1981 its sales had reached $14 billion, 56 times their level in 1967, Charles Koch's first year as head of the company, and in some quarters Koch was beginning to be called an oil major in its own right. The company picked up a second refinery in 1981, paying $265 million for a Sun Company plant in Texas, and had greatly expanded its capacity in gas-liquids fractionating and asphalt production, to name only two of its myriad activities. While Koch had little luck in its exploration efforts, in 1979 the company moved decisively into the real estate business, joining Wichita businessman George Ablah in the formation of Abko Realty Inc. Abko was created specifically to buy Chrysler Realty Corporation and its several hundred Chrysler dealership sites around the country. It is believed that the hard-pressed Chrysler sold the unit for less than $100 million in cash.

Family Feud in 1979 Culminated in First of Several Lawsuits

The year 1979 also marked the beginning of the feud that eventually would split the Koch family. William Koch, five years younger than Charles, grew restive with his secondary role at Koch and began pressing his brother for more power, freer access to information, and some means by which a fair market value could be assigned to the company's stock. As a private company, the only likely buyers of Koch stock were other stockholders, who, in the absence of an open market, would pay far less than the shares might otherwise fetch. William Koch gained the support of the oldest brother, Frederick, until then relatively uninvolved in company affairs, and the two of them launched a proxy fight in 1980 aimed at ousting Charles from his leadership. The attempt failed, and after a round of lawsuits and mudslinging, William and Frederick Koch were bought out in 1983 by Charles and David Koch for around $1.1 billion in cash. From that time well into the 1990s, William Koch has continued to wage legal and emotional warfare against Charles Koch, going so far as to hire private detectives to gather evidence of wrongdoing by Koch Industries that was subsequently handed over to federal investigators. In 1987 the Justice Department announced it was investigating several companies on price-fixing charges, a Koch unit among them.

Later in the 1980s a U.S. senate investigation forced Koch Industries further into the limelight. In 1989 the Senate looked into charges that Koch had been stealing oil from Native Americans in Oklahoma by deliberately mismeasuring the crude oil it was buying. A committee concluded that Koch had stolen $31 million in oil over a three-year period. Koch vigorously denied the charges, and hired public relations experts for the first time to fight the battle of public opinion. The committee submitted its findings to the Justice Department, which three years later dropped the case. William Koch did not let the matter drop, however, and subsequently filed yet another lawsuit--this one for $400 million--alleging that Koch Industries had defrauded the federal government by stealing oil on federal land.

The parade of litigation continued for Koch in April 1995 when the Justice Department, the Environmental Protection Agency, and the Coast Guard filed suit against the company for allegedly being responsible for more than 300 separate oil spills since 1990. The government claimed that 55,000 barrels of oil were spilled from Koch pipelines, some of which polluted wetlands and, in the biggest offense, Corpus Christi Bay on the coast of Texas. Koch, which faced a penalty as high as $55 million but was likely to pay only $5 or $6 million, claimed that more than half of the spills cited by the government had never happened.

Dealmaking Continued in the 1990s

Meanwhile, Charles Koch continued to build the company through wheeling and dealing in the 1990s. Among the deals were: the $21 million purchase of a marine terminal and other pipeline and oil gathering systems from Ashland Oil Inc.'s Scurlock Permian Corp. in 1991; the 1992 purchase of the 9,271-mile United Gas Pipe Line Co., with annual sales of $370 million and a valuation of $1.1 billion; the early-1995 acquisition of a second refinery in Corpus Christi, Texas, from Kerr-McGee Corp.; the formation of Koch Paper Technology Group in mid-1995 to consolidate Koch's activities in the pulp and paper industry; and the $250 million acquisition in mid-1997 of Glitsch International Inc., a supplier of products and services to the petroleum and chemical industries, from Foster Wheeler Corp.

By 1996 Koch Industries had revenues of about $30 billion, a 300-fold increase in the previous 30 years. It operated more than 40,000 miles of pipeline, refined about 540,000 barrels of crude oil a day, was the largest buyer and seller of asphalt in the country, ranked in the top 10 among U.S. calf producers, and was the country's 34th largest landowner (according to Worth magazine). These diverse operations--many of which were often overlooked businesses that Koch specialized in making money from&mdashøgether formed one of the world's great private fortunes. As a private company, Koch had the advantage of being able to move fast to pick up undervalued assets as soon as they became available.

Notwithstanding the various unresolved lawsuits, when Koch looked to the future it planned to become more heavily involved overseas and wanted to beef up its capital services unit which was involved in oil, commodities, and currency trading through offices in Wichita, London, and Singapore. Not as publicity-shy as it once was--the company had even created a web site by 1997--Koch Industries promised to continue its position as one of the country's most diversified and important industrial corporations.

Principal Operating Units: Refined Products Group; Chemicals Group; International Group; Energy Services; Crude Oil Services Group; Chemical Technology Group; Operations; Mineral Services Group; Gas Liquids Group; Agriculture Group; Capital Services Group; Materials Group.

Koch Industries, Inc. History

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