How Bill and Frederick Koch Walked Away From Billions from Koch Industries

Nearly 6 years ago I blogged about the Koch vs. Koch lawsuit. The lawsuit was one of the longest and most intense family battles in corporate American history. Well that history is all in the past but the question should be asked what if the lawsuit was never filed? What if Charles, David, Bill, and Frederick Koch were still today all shareholders of Koch Industries?

The ownership of Koch Industries stock goes back to the 1960's. During 1966 and 1967 Fred Koch gave all of his stock of Koch Industries to trusts that were created for his four sons. The type of trusts that were created were charitable lead trusts (CLT). These types of trusts pay income to charity for a specific period of time and then revert back to either a spouse or family member and pay income to them. Each brother was the co-trustee of the trust along with First National Bank of Wichita. According to Sons of Wichita in the summer of 1968 Charles Koch offered his brother $120/share for the stock (8 months after father Fred Koch passed). Frederick had roughly 1.5 million shares of Koch Industries stock at the time so his payout would have been roughly $180 million. This was actually a pretty good offer given when Frederick was bought out in 1983 he would receive $200 a year 15 years later.

Disagreements between the Koch family emerged when Bill Koch in July 1980 wrote an 11 page letter outlining how he didn't agree with the way brother Charles was running Koch Industries (he would refer to him as Prince Charles), the level of dividends being paid out, and feeling that the board of directors of Koch Industries were too passive. When twin brother David testified about the 11 page letter that Bill Koch wrote and was asked if these concerns were valid David responded that his twin brother "was always writing letters". David would go on to testify that Bill would be "obsessive" and David would also testify that he would question brother Charles on major company issues but not nearly as contentious as brother Bill was.

According to David "Billy wanted more money..his appetite for money was insatiable". In 1979 David and Bill were each earning $250,000 in salaries as vice presidents, bonuses of $850,000, and then $1.9 million in dividends from Koch Industries stock (in 1980 the dividends alone would be $3.7 million-but Bill thought the dividends should have been doubled). David believed the the compensation "was way more than we deserved". Bill Koch admits in this 2004 New York Times article that he likes to collect everything (he says "my brother Charles collects money, David use to collect girls, but not anymore, and Fred collects castles). Apparently the dividends were not enough to cover his living needs as he told Sports Illustrated that the 7% of company earnings that the company was paying out was quite paltry and he had  "to borrow money to buy a house..and I'm one of the wealthiest men in America". Charles Koch in a recent interview with Peter Robinson would say that Koch had "a small number of shareholders so we can reinvest 90% of our profits in the business so that gave us the capital to continue to do what we do and still pay out enough so our stockholders had all the money they needed".In addition to the dividend Bill also disagreed on the "autocratic" nature of how brother Charles Koch was running Koch Industries. According to Bill "our disagreement in Koch Industries was basically for whose benefit was the company being run". He also said that "I thought it was properly libertarian to let shareholders spend their own money".

Before the lawsuit Charles, David, Bill each owned a 20.7% ownership in Koch Industries. Frederick owned 13.7% of Koch Industries. On June 10 1983, Frederick sold his shares for $345 million and Bill sold his shares for $470 million. Remember this was almost 35 years ago. Typically when people sell that much stock in a small business it is known a liquidity event. Now if they had stayed at Koch Industries with their ownership interests Bill's 20.7% ownership would be worth roughly $30 billion (if Charles and David Koch each own a 42% interest in Koch Industries and their net worth each is currently worth $62 billion this would say a 20.7% interest would today be worth close to $30 billion).  Fredrick Koch has a smaller interest (13.7% in Koch Industries) and using the same logic would be currently worth $20 billion. Frederick Koch is said to be worth roughly $2 billion. Younger brother Bill Koch is worth about $1.7 billion (Forbes March 2018). Bill's net worth in the past few years has been declining (it was $4 billion in September 2012).  Now if Frederick and Bill had invested those monies in the stock market after the buy out in 1983 they would have $15 billion and $21 billion respectively.

In the best case financially would have been for Bill and Frederick to stay at Koch Industries. Bill would have a 20% interest in Koch Industries be worth roughly $30 billion and have roughly $100 million in dividends from the company (based on the analysis I did back here). Frederick would be worth $20 billion if he had stayed at Koch Industries and be earning roughly $67 million in dividends a year (again base on the analysis I did here). Even if Bill and Frederick invested their money in the stock market they would still have much more than they do today. Bill would have $21 billion and with a dividend in the stock market of 2% would be $420 million of cash every year and Frederick would have $300 million in cash dividends. This type of money would allow Bill to buy his art, wine and other collectibles and allow Frederick to purchase castles all across the world. So the question is why don't Bill and Frederick have this type of money today?

Well it appears they both have been spending their money since the 1983 buyout as they don't even have a fraction of what they would have even if they invested the proceeds in the market. Perhaps we could call them the consuming Koch brothers. Bill Koch recently was forced to sell the company he founded (after he was bought out) for $2.6 billion. Frederick Koch who is now in his mid 80's (here he is at a spring gala last year) has has a history of purchasing castles and properties and restoring them. Bill Koch may have complained about the lack of dividends that Koch Industries was providing, however had he continued to stay on he would have a large multiple of the income he receives today. All this illustrates how Charles and David Koch grew Koch Industries while Bill and Frederick cashed out of Koch Industries and consumed most of their proceeds for living needs.