Chase Koch Startup Grind Interview and Q&A

Koch Industries Profit Margins and Dividends Update

I have spent time in the past analyzing and estimating the profit margin of Koch Industries and also estimated how much David Koch, Charles Koch, and the Marshall family pull in from dividends. It has been some time since I looked at all of this and wanted to update these figures given recent information.

A recent estimate shows that Koch Industries earns $110 billion of revenues per year. This brochure from Koch Industries shows that Koch has reinvested $100 billion back into the company since 2003. Koch reinvests 90% of their earnings back into the company. The brochure has a publication date of 2018 so let's assume $100 billion was reinvested over a 15 year period (2003-2018). So if $100 billion represents 90% of earnings that were invested back into Koch Industries this would say that Koch earned $110 billion from 2003 to 2018. The average Koch would earn per year would be ~$7 billion a year ($110 billion/15 years). This is of course is before taxes are paid. The average tax rate paid by S&P 500 companies is 24%. Factoring in 24% taxes would say Koch earns around $5.6 billion per year after-tax. Of course as I mentioned this is an average. The $100 billion was over a 15 year period. So if we use the average amount per year of ~$7 billion and use 2010 as a starting point (the middle of the years in the 15 year period) and grow it by 12% per year (this is the average growth rate of Koch Industries as discussed by Charles Koch and also discussed in this Discovery Koch newsletter) it would say Koch Industries earns ~$18 billion (this estimate would be on the high side).

Now the question is if Koch earns $110 billion in revenue how much is profit (after-tax)? Well under a conservative view it would be ~5% ($5.6/$110 billion) and under probably a maximum amount of roughly 13% ($14 billion/$110 billion). The true profit margin for Koch Industries is probably somewhere in between 5% and 13%. As I mentioned in this post Koch Industries in 1982 had revenues of close to $17 billion and had earnings on that revenue of $309 million. In the prior year of 1981 the company (according to the Koch vs. Koch case) had $15.7 billion in revenue and earned $273 million which would only be a profit margin of 2%. This would say Koch has a razor thin profit margin of 2%. Another way to look at profit margin is let's say there are 365 days in one year. If Koch has a 2% profit margin this means the company is only making profit 7 days out (2% x 365) of the year. Also in a recent article about Koch Disruptive Technologies it is mentioned that this division is a pre-revenue company which to me translates into no revenue, no earnings, and no cash flow. The other thing to consider is the largest asset of Koch Industries is Georgia Pacific. Before Koch purchased Georgia Pacific the company had a profit margin as I mention here of only 3%. According to Bloomberg Georgia Pacific has estimated revenue of $19.4 billion-this would currently represent about 18% of all the revenue that Koch Industries earns.  This would lead me to believe the profit margin is closer to the 5% than the 13%. The average profit margin recently for S&P 500 companies is 11.1%  which would mean many companies have a higher profit margin than Koch Industries.

Now that the revenues and profit margin are better understood the dividends for Koch Industries can be examined. If Koch earns on average $7 billion/year ($5.6 billion after paying taxes) and pays out roughly 7% of their earnings as dividends (the company did at one point did pay out only 1% of earnings as mentioned in this article from the late 1980's) and if Charles and David Koch own each a 42% interest in Koch Industries stock then Charles and David Koch each pull in ~$160 million per year in dividends (once Charles and David receive the dividends they also pay income taxes on that income as well). If we use the average amount of $5.6 billion of earnings (after-tax) and start in 2010 and grow this by 12% per year then the earnings would be ~$14 billion (after-tax) by 2018 and if Koch pays out 7% of their earnings as dividends x a 42% ownership interest would mean over $400 million dividend each for Charles and David Koch. Using these same metrics would say that the Marshall family (who have a 15% interest in Koch Industries) would generate between $60 million and $140 million per year in dividends. This dividend estimate seems quite reasonable as Preston Marshall (son of Elaine Marshall) would testify in court that the trusts that held Koch Industries stock would generate $120 million per year in dividends. Preston handled the administrative work for her trusts (prepare the books, prepare tax returns, facilitate trust distributions for his mother Elaine Marshall) so he would have an understanding of what occurring.

My estimates would show that Koch Industries has a profit margin between 5% and 13%. My estimate is the profit margin is closer to the 5% figure though. Also the company generates dividends for Charles and David Koch between $160 million to $400 million per year. For the Marshall family Koch Industries stock generates between $60 million to $140 million per year. This would say that Koch Industries pays between $380 million to $940 million in dividends it's shareholders. My guess would be the dividends are on higher end given the testimony of Preston Marshall. The growth of dividends came from a company policy of reinvesting 90% of earnings back into the company which would scare most S&P 500 companies. This growth has fueled not only the growth of Koch Industries but also the dividends to Koch Industries shareholders.

Koch Industries (Case Study): Dividend Growth Rate, Profit Margins, and Reinvesting 90% of Earnings

Koch Industries has seen tremendous growth in the last 50 years. This has been primarily due to the vision of Charles Koch to continuously improve and grow the company. There is no question that Charles Koch has one if not the best of track records in terms of the rate of long term growth rates of any corporation.

The main reason for this astounding growth rate is the company reinvests 90% of their earnings back into the company (no major publicly traded company would ever consider doing this). Publicly traded companies have to deal with managing investor expectations and like to see smooth increases in earnings and steady increases in dividends. As Charles Koch mentions in this interview with Peter Robinson that Koch Industries had "a small number of shareholders so we can reinvest 90% of our profits in the business so that gave us us the capital to continue to do what we do and still pay out enough so our stockholders had all the money they needed". Koch has also diversified into other businesses over the years. In the 1970's Koch purchased Chrysler Dealerships for $195 million and then by 1982 had sold back 480 properties. In 1989 Koch entered the nitrogen fertilizer business. By 1995 the company created a venture capital fund that invested $150 million into start up companies. More than a decade later Koch would purchase Georgia Pacific This SEC file page and this Wichita Eagle from 1994 (page 24) offer insights into the rapid growth of Koch Industries and the rate of which they were involve in acquisitions. Even the chemical technology group of Koch Industries that David Koch ran saw massive growth. During his 48 year tenure David expanded his division and his division alone purchased 50 businesses (about 1 business on average every year).

One merger that really grew Koch Industries was acquiring Georgia Pacific. Georgia Pacific back in 2004 only had a profit margin of 3%. In my Georgia Pacific case study post I noted that Georgia Pacific is roughly worth $30 billion. Georgia Pacific also consisted of a large portion of the revenue generated by Koch Industries. The history of Koch Industries would also support low profit margins. Charles Koch mentions in this interview that when he took over Koch Engineering the subsidiary had only $2 million in revenue and was pretty close to break even. After Charles took over within a few years sales had doubled and also had a good return. In 1981, according to the Koch vs. Koch case Koch Industries had a roughly $15.7 billion in sales and had earnings of $273 million which would say that profit margin was only under 2% (which is quite low). In 1982 Koch Industries had revenues of close to $17 billion and earned $309 million which would be a profit margin of a little under 2%. The only problem with a low profit margin is if you invest in enough bad capital projects you would risk the safety of the company.

Koch Industries has an unusual policy of reinvesting 90% of their earnings back into the company. In this 2013 Fortune article it is mentioned that Koch Industries spends roughly $100 million per year just on research.When corporations have earnings they either can reinvest by growing and expanding the company or pay out the earnings as a form of a dividend. According to this Koch brochure from 2003 to 2014 Koch Industries invested $65 billion into mergers and acquisitions. If $65 billion represents 90% of the earnings it would say that Koch during this time period earned roughly $72 billion. Now this would say that the company earned on average $6 billion per year. I would highly emphasis on average given Koch is known for continually to grow earnings. The issue with reinvesting 90% of the earnings back into the company is that not all projects will work out. Usually in corporations capital spending is reviewed by a team of individuals and then has to be approved by management before the money can be allocated and spent (the more money that is spent the higher level of approval the project has to receive). There are assumptions made regarding the return on capital the project will produce. Often times companies may have hundreds of projects but only have so much capital so they have to be selective about which projects get funded. Companies will rank the project by the return on capital invested.  By reinvesting 90% of the earnings it would be hard to justify that all projects are worthwhile. However, the history has shown that Koch has invested in projects that have done quite well.

The extreme growth in Koch Industries has led to an amazing increase in the amount of dividends for Koch Industries shareholders. According to Sons Wichita in 1967 (when Fred Koch passed away) the company only paid out $300,000 in dividends (would be roughly $2 million in current dollars). By 1978 the dividend payouts were $3.7 million and by 1980 grew to $17.5 million and then to $28 million in the early 1980's. Not only was the Koch family doing well from the dividends but other Koch shareholders were also doing well too. J Howard Marshall in the mid 1990's with his 15% interest was earning between $7-8 million in just dividends from 1994-1995. Again as the growth of Koch Industries exploded so did the dividends. In 2015 Preston Marshall testified that his mother Elaine Marshall earned roughly $120 million in dividends per year. She currently owns roughly 15% of Koch Industries stock (Charles and David each own 42% each). This would say based on ownership (assuming all this income from Elaine Marshall was from Koch Industries) that Charles and David Koch would each earn roughly $336 million just in dividends each year from Koch Industries. In total the dividend payout for all of Koch Industries would be roughly $792 million. Doing an analysis from after Fred Koch passed away in 1967 would say that the increase in dividends on average has been 18% per year! This rate seems accurate as in Good Profit the description shows that Charles Koch grew the company from a $27 million company in 1967 to a $110 billion company by 2015 would say the growth rate of the company was on average roughly 19%/year which is similar to the growth rate of dividends.

Koch in the past decade or so has entered into other industries that may provide some increase to the historically low profit margins. The most notable recently is Koch has been lending businesses money. In 2013, Koch invested $240 million into American Greetings (a greeting card company) and obtained preferred stock. Preferred stock is more like a bond in terms of an investment. A company like Koch would lend another company money and then get a fixed return (similar to a bond).When Koch made their investment the company was roughly worth 65% less than it was worth in 1998. At the time CFO Steve Feilmeier said the greeting card business "its revenues are flat to slightly growing" and made the comment of trying to send a text to your spouse on their birthday and see how it works out. In late 2017 Koch invested $650 million in Meredith Corp (Meredith was bidding for Time Inc) and a result secured preferred shares that pay a 8.5% dividend (no voting rights though). Koch also received warrants and options that allow them to convert the warrants and options into common shares.

In 2013 Koch purchased Molex Industries for $7.3 billion.  Molex manufactures connectors, wires, cables, and connectors.  From the 2013 Molex annual report the company had a net income of $243 million on roughly $3.6 billion of revenue which would mean the profit margin would be ~7% which appears to be higher than historical profit margins the company has had. $7.3 billion is actually a large price to pay for a company that generated $243 million of net income. If you divide the purchase price by the net income it would say it would take roughly 30 years to justify the value of the deal. This SEC fact sheet for Koch Industries shows the company has an average holding period of 20 years for investments.

Koch in 2017 invested more than $2.5 billion for a large stake of Infor and acquired common and preferred shares of stock. In this video, Koch CFO Steve Feilmeier explains why Koch invested in Infor.  Infor uses software to help companies mange their inventory, accounting processes, logistics, and human resource functions. Georgia Pacific was a customer of Infor which is how the discussions for the investment started. Koch Industries used the investment bank Rothschild for the deal. Koch has part of the deal received preferred stock and common stock in the company. Infor financial statements can be found here (the company is highly profitable).

It appears that in the past Koch Industries had low profit margins given their primary business was crude oil gathering and refinery business. Over time though Koch would diversify their business holdings and tried to invest in industries that would diversify Koch Industries and have a higher profit margin. Charles Koch in this interview when asked what his father Fred Koch would think of the company now given the company has expanded into so many different areas Charles said his father would say "Holy mackerel".

Koch through diversifying over time has decreased the overall business risk (since they don't have all their companies in oil/gas). The Koch Industries today is a conglomerate more similar to Proctor and Gamble or Berkshire Hathaway. By taking the average earnings of the company every year $6 billion and dividing that by the revenue $115 billion would say that Koch Industries has a profit margin of roughly 4-5% which is more than double the profit margin the company had in the 1980s. There is no doubt that Charles Koch and his vision have made Koch Industries wildly successful over many decades. The reinvestment of dividends has grown the revenues, net worth, and dividends of the company.

David Koch Retiring and The Future of Koch Industries Estate Planning

So with David Koch recently retiring (his official retirement date is July 1, 2018), and I mentioned in my last post that Preston Marshall was accused of spousal abuse and this may affect his ability to own Koch Industries stock. Clearly, the chairman and CEO Charles Koch is dealing with plenty of issues right now. Honestly Charles hasn't had to deal with anything like this since the Koch vs. Koch trial back in the late 1990's. 

The Preston Marshall issue should be interesting. It is mentioned that Preston Marshall owns the most amount of shares outside Charles and David Koch. Earlier in 2018 Preston was accused of spousal abuse. It is said that his wife is in the process of divorce proceedings with him. Of course I am sure he was smart and had a prenuptial agreement for this situation to block her access from his wealth.

The Koch Family has a family office called 1888 Management LLC. Family offices typically handle the investment strategy, the philanthropy strategy, and manage the assets and the entities for one family and facilitate communication between the older generation and younger generation to ensure that there is family harmony when assets are passed down to future generations. In addition to this, a family office can handle things like paying bills for the family, coordinating travel plans, ensuring the security detail, among other tasks. The board of managers for 1888 Management LLC are Steven Feilmeier who is currently the CFO of Koch Industries, Elizabeth B. Koch (wife of Charles Koch), David Koch, Anna B Koch (wife of Chase Koch), Jason Kakoyiannis (who is married to Elizabeth Koch-daughter of Charles and Liz Koch). It should be

It appears David Koch is in bad shape health wise and may not have long to live (personally I wish David Koch had written an autobiography at some point-he has had a very interesting life for sure).  I covered his lifestyle in depth in this post. As someone who worked at Koch Industries his whole career he must not be happy not being able to go to board meetings and make decisions at Koch Industries. The question is what will happen to his ownership of Koch Industries stock?

Most likely his shares would go to his wife Julia. His shares can pass to Julia without having any estate tax consequences (this is known as the martial deduction). Even Charles Koch doesn't have a few billion dollars laying around since nearly all his net worth tied up in Koch Industries stock. David Koch has said in this article regarding the shares of Koch Industries "once we pass on, our children will acquire the stock, and I want to see Koch Industries continue to grow". His shares probably would go first to Julia Koch and then to the children of David and Julia Koch. If Julia Koch is in her mid 50's she would have many decades and possibly see if her children would get involved in Koch Industries.

There are some strategies that Koch Industries could use for the estate planning. The first option would be to go public in order to access capital. However, Charles Koch has said many times that Koch Industries will go public literally over his dead body. Charles Koch in this Forbes article did mention that the family has been performing estate planning for "many years". With this comment and given my last post on the Marshall family. Charles and David Koch have most likely engaged in setting up trusts and trying to get Koch Industries out of their estates and passing it on to future generations. By using grantor retained annuity trusts (like J Howard Marshall III and the Marshall family) and family limited partnerships (FLPs) Koch can pass shares to their children. The only issue is that the family is to pass $22.4 million for a couple without hitting estate taxes. There is not only estate taxes but also generation skipping tax (GST) which are in addition to estate taxes. This is to prevent generations from continuing to pass down wealth. At some point a future generation will have to pay generational skipping tax (of course unless they set up a dynasty trust).The Koch family has personal experience with estate taxes. Fred Koch was concerned about making sure Koch Industries kept liquidity before he passed. During the 1960's the estate tax rate was 77% for anything over $60,000.  In 1962 Charles and Sterling Varner (who had worked at Koch Industries since 1946) wanted to purchase two trucking companies to further expand the crude oil gathering business for Koch Industries. However, Charles from his father was only given approval to purchase one company. Fred Koch went on a trip to Africa and when Charles picked his father up from the airport Charles told his father he ended up purchasing both companies. Fred Koch was furious as he was trying to save cash to pay estate taxes. Charles Koch couldn't pass up an opportunity for growth even if it pissed off his own father. A similar situation occurred in 1967  when Charles Koch wanted to start construction on a new manufacturing facility for Koch Engineering. Charles explained to his father that there was farmland that Koch owned and Charles suggested it be used to build a bigger and better facility to handle the growth of the company. The cost of the facility would be $1.5 million (which would be about $11 million today and Fred Koch replied "A million and a half" We can't afford that".  The deal would lead to the home of Koch-Glitsch which would represent the company to expand their product offerings. Fred Koch would pass away later that year on November 11, 1967.

Another strategy that is sometimes used for high net worth individuals is to purchase life insurance to cover estate taxes. Charles and David Koch were planning to have a meeting with an insurance agent to discuss this however the agent (Michael D. Brown) was unable to make the meeting and lost a $8 million commission as a result. The IRS would comment that this technique would not be advisable. However, if individuals purchase life insurance three years before they pass they can get that out of their estate. This strategy is known as setting up an irrevocable life insurance trust (ILIT). An insurance policy is purchased and placed in a trust. As long as the individual lives more than 3 years the life insurance policy will not be included in their estate. The only issue with this as you age the cost of the insurance premiums increase and it may be uneconomical to do. For executives or important individuals at a company often companies will purchase key person insurance. The purpose is to recognize individuals that have an important role with the company and the insurance pays out of that key individual passes to help the business continue on.

The company could use cash flow from the business to cover the estate taxes. It is estimated that Koch Industries in 2012 earned $8 billion before income taxes and depreciation. Koch on average tries to double every 6 years which would say that the company in 2018 earns closer to $16 billion before income taxes and depreciation. If we assume Charles and David Koch are each worth $51 billion then their total net worth is $102 billion. With an estate tax rate of 40% this would say that roughly a little over $40 billion would be needed to pay the estate tax (this of course assumes no estate planning had been done already). Also for David Koch since he lives in New York he will owe New York estate taxes as well. New York estate tax rates are 16% (this would add another $6 billion of taxes roughly). You are able to deduct the state taxes you pay on your federal estate tax return though. On the positive side Koch Industries could pay this out over a number of years. Using Section 6166 the Koch family could have up to 14 years to pay the estate tax. Although they would have to pay interest (however you would have to compare the rate Koch Industries was going versus this). There is no question over this amount of time Koch Industries could pay off the estate taxes owed by using the cash flow from the ongoing business.

There is no doubt that the next few years for Koch Industries will be interesting and be critical for the future as you have a major shareholder retiring. The Koch family most likely has done extensive estate planning to relieve the possible burden of estate taxes. Property records for example show David Koch has set up his homes into different trusts. Charles Koch also has his homes in trusts as well too.  The objective here is by having a home in trust it avoids going through the probate process-which is public.  I would imagine they have set up trusts, done complicated estate planning, purchased life insurance, and have some cash set aside to cover the estate taxes. There is a good chance that the IRS will contest the estate value of Koch Industries stock as it is a closely held business (this could end up lasting years) and there isn't much of a market for the stock. My prediction would be shares will ultimately end up in the hands of Chase Koch (it should be pointed out that he has children of his own), Elizabeth Koch, John Mark Koch, David Koch Jr, Mary Julia Koch, and the children of Preston Marshall and E. Pierce Marshall Jr. With this number of shareholders there could be no doubts fights and feuds over ownership of the company which could lead to buyouts of certain shareholders down the road. Koch Industries has done very well over a long period of time.  In my last post it was reported that Elaine Marshall who is a shareholder of Koch Industries earned $120 million in 2015 (she has roughly a 15% ownership of Koch Industries stock). This would say that even a 1% interest in Koch Industries stock would yield about $8 million of a dividend (this would say Koch pays out roughly $800 million in total of dividends). Charles and David Koch has grown the company dramatically which has increased not only the earnings but also the dividends. There is no doubt that the future for Koch Industries will be interesting and perhaps even more interesting than the past. As the modern philosopher Sean "Puff Daddy" Combs says "it's like the more money we come across the more problems we see".

Preston Marshall Spousal Abuse and Marshall Family Ownership of Koch Industries

As I covered in my last post David Koch recently retired from Koch Industries. It was mentioned that his effective retirement date is July 1, 2018. Also a number of months ago Preston Marshall who is in his mid forties has been alleged to have committed spousal abuse. Preston's is the grandson of J. Howard Marshall III and the son of E. Pierce Marshall. Family matters in the family haven't gone well. Preston in 2015 filed a lawsuit against his mother (Elaine Marshall) regarding the payout of the trusts that were established. The Marshall family own 14.6% of Koch Industries stock. A spokesperson for the Marshall family said that "Mrs. Marshall does not own any Koch Industries stock in her name"-this is true as the stock is owned by trusts. Charles and David Koch own 84% of Koch Industries stock. Preston also sits on the board of directors for the libertarian think tank the CATO Institute. Bob Levy who is chairman of the CATO Institute has said that if Marshall is found guilty of the allegations he will be removed from the CATO Institute Board. It is alleged that Preston Marshall is the largest shareholder of Koch Industries outside Charles and David Koch. The question would be if Preston is found guilty of spousal abuse would Charles Koch force him out as a shareholder?

On May 12, 2017, Preston went to the Petroleum Club in Houston and became intoxicated and physically assaulted his wife (he ended up headbutting her). Preston in his testimony would assert his fifth amendment right. As a result of this his wife Anastasia has started the proceedings to file for divorce. This is important because the Marshall family is a shareholder of Koch Industries stock and if Marshall is found guilty this could have other implications as well given he is a shareholder of Koch Industries stock too. I couldn't imagine Charles Koch having a shareholder who was found guilty of spousal abuse (but then again J Howard Marshall III use to visit strip clubs and pay women thousands of dollars per month in "consulting fees"). Although let's also be clear this is perfectly legal.

Preston is a graduate of Baylor University and in his earlier years worked as a management consultant for Ernst and Young. Also he was a managing director of CarTech Systems. Preston was quite engaged member of many social organizations. In 2015 he became a trustee of the elite Houston Kincaid School. In the summer of 2015 he was named as a Trustee for the school. He and his wife Anastasia currently have two daughters in Kincaid (three children total). His children are between the ages of 7-12. Preston was also part of the Petroleum Club's Capital Campaign Committee in 2015 and was on the board of directors from 2015 to 2016. Property records shows that Preston and his wife own a condo in Houston that is only 1 bedroom.  Preston married Anastasia McCarthy in January 2008 (the marriage certificate can be seen here) by a justice of the peace. Preston started to work for MarOpCo in the late 1990's (the family office of the Marshall family) and became President of MarOpCo (the family office for the Marshall family) after his father would pass. As part of his duties he would handle the tax return preparation and facilitating trust distributions  In June 2015, Preston would be not only fired; but locked outside his office with all his records and books removed from the office. Marshall recently resigned as a trustee from the elite private Kincaid School due to personal reasons.

The brother of Preston Marshall, E. Pierce Marshall Jr. appears to be a contrast from his brother Preston. E. Pierce Jr graduated from Tulane with a finance degree and then graduated from Yale Law school (J Howard Marshall III also went to Yale as well). He is the President and CEO of Elevage Capital Management.

As part of his will father E. Pierce Marshall (son of J Howard Marshall III) set up a grantor retained annuity trust (GRAT) that transferred to the EPM Martial Income trust (this trust would benefit Elaine Marshall). What is quite interesting is Pierce established the martial trust 6 weeks before he passed away. Also before he passed E. Pierce set up both the Irrevocable Harrier Trust and The Falcon Trust were established in May 2006. Elaine Marshall would serve a trustee for both trusts. Elaine then hired a Louisiana law firm to hire five people as co-trustees that she had never met or knew (a lawsuit would arise from this). According to a court case  the Marshall family owns Koch Industries Inc. and Koch Holdings LLC through various trusts (EPM Martial Trust, Harrier Trust, and Grandchildren's #2 Trust). In order to manage all these various different trusts the Marshall family has had a history of different holding companies to manage all these entities and trusts. The first entity that was established was MPI (Marshall Petroleum Industries) by J Howard Marshall III. Then Trof Inc. was established on February 26, 1985. Inside the Trof Inc. company is a grantor retained annuity trust (GRAT) known as the 2006 Grantor Retained Annuity Trust (GRAT). Inside the GRAT are Ribsome L.P. units which are actually family limited partnership units that actually holds Koch Industries stock. The idea setting up GRAT's is to get assets out of the estate that people believe will highly appreciate. Typically wealthy families will use family limited partnerships to transfer ownership from the older generation to the younger generation to avoid estate taxes. Often times families that set up an FLP will receive a discount for estate taxes on the valuation of the assets they give away allowing them to get it out of those assets estate. According to his testimony Preston says that Koch Industries shares can't be sold directly to Koch without the consent of other shareholders.

An expert valuation stated from the time that J. Howard Marshall III ownership of Koch Industries stock in 1994 the stock was worth $741 million and by 1999 the Koch Industries stock was worth $1.6 billion. Texas Commerce Bank would say at the end of 1995 the stock was worth $780 million. During 1994-1995 J Howard Marshall III would earn $7-$8 million in dividends from Koch Industries stock. This would say that he would receive less than a 1% dividend yield on his total net worth of Koch Industries stock. Marshall would even use 59% of his Koch Industries stock as collateral for the bank!  In more recent times the income Elaine Marshall would receive through all her trusts was roughly $120 million for a 14.6% interest. The $120 million income amount would represent the last figure Preston Marshall remembers from June 2015.Charles Koch has a philosophy of investing 90% of the earnings of Koch Industries back into the company and providing a dividend for remaining shareholders to live comfortably.

The growth of Koch Industries over the last 50 years has significantly increased the net value of the Marshall family and allowed them to have ample income due the dividends of Koch Industries. Although the dividends of Koch Industries is low on a percentage basis the growth of Koch Industries has dramatically grown the dividends as well. Also it appears the family has done sophisticated estate planning to try to get Koch Industries out of the estate of Elaine Marshall. Given that Koch Industries has grown substantially over the years the GRAT and FLP were good vehicles to get this out of the estate of the Marshall family. However, I am sure the IRS will have some questions on the valuation of Koch Industries stock once Elaine Marshall passes. Most likely the stock would pass (if it hasn't done so already) to Preston Marshall and E. Pierce Marshall Jr. Then after that it would pass to any children of the Marshall family. However, it will be interesting to see if Preston Marshall is found guilty on charges of spousal abuse will he be able to sell his shares back to the Koch Industries? Will Charles be able to buy out both the shares of Preston and brother David? Time will tell and most likely Charles Koch has plenty on his plate right now with his long time partner and brother David Koch retiring.

David Koch Retires What Happens Now?

So on June 4, 2018 it was announced that David Koch would retire from Koch Industries citing health issues. In addition to retiring from Koch Industries David would also retire from his board position at Americans For Prosperity. David will still stay on the Koch Industries board as an emeritus director. The letter from Charles Koch to all employees of Koch Industries read more somewhat of an obituary. Charles wrote "My thoughts of David will always be overflowing with the experiences, challenges, laughter, and love of our life together". The one page letter also notes that David helped grow the Chemical Technology Group of Koch 1,000 fold during his tenure.  Koch Chemical Technology Group has 6 different divisions and Bob DiFulgentiz runs the day to day operations of the company. In the roughly 48 years David was at Koch Chemical Technology group he massively expanded the subsidiary of Koch Industries from a single-product business into many different products and services. While David Koch's tenure the subsidiary purchased more than 50 businesses. These days the chemical technology group is sells and offer many different products. The company sells: mist elimination equipment for refineries and chemical plants, sells equipment to purify the water supply, offers products for companies to control their emissions (yes Koch Industries actually sells products that helps companies reduce the amount of pollution), assists companies in turnaround projects (this is typically where a chemical or refinery plant is shut down for some time and the company is performing maintenance or upgrading the plant capabilities).

David started with Koch Industries in 1970 as a technical services manager and founding the New York office. In 1979 he became in charge of Koch Engineering. In his most recent position he was an Executive Vice President of Koch Industries and oversaw Koch Chemical Technology Group. This subsidiary of Koch actually does help companies become more efficient and pollute less. Just recently Koch helped reduce the nitrious oxides emissions of a tomato company by 1,600 lbs in one year even while the company increased doubled the capacity.  David nearly every week would fly from New York to Boston and spend 2 days at Koch Membrane Systems in Massachusetts. Back in 2008 Koch Membrane had sales of $110 million. Koch Membrane turns dirty water from the ocean or that is left over from a refinery and converts it into clean/drinkable water. Back in 2011 the company was building a facility that would be used by local industrial companies that would save enough drinking water to supply 600,000 residents.

What is interesting is that Koch Industries doesn't have a replacement for David Koch. Usually large Fortune 500 companies spend years grooming successors to step in for them to learn the job and also to prepare for situations like this. Also I am sure customers, suppliers, and employees within the company are wondering what the next steps are for the company. The letter that Charles wrote said that David had been hospitalized during the summer of 2016 and at that point had been suffering from declining health. To me this signals that David Koch is in quite bad shape given he really enjoys working. In fact in this Newsmax profile from 2012 he said "my brother and I are going to be carried out of our offices feet first. We'll work until we drop". Koch is known as a hard worker as he often would get to the office at 9 A.M. and stay until 7 P.M. (with 12 hour days not being unusual). For a man nearly 80 years old this could take a toll. In addition to his job Koch also serves on the board of 21 different organizations (this would be a full-job in itself).

Koch has long battled prostate cancer and was initially diagnosed in 1992 with prostate cancer. According to Sons of Wichita in August 1993 after being treated with radiation and finally entering remission thanks to Sloan-Kettering David decided to have a $100,000 fireworks display along with an orchestra champagne soiree at his Southampton place. Back in 2012 David had a bout with diverticulitis and was given antibiotics intravenously for a week and then oral antibiotics. Koch says if he didn't have those antibiotics his colon would have ruptured and he most likely would have died. While in college Koch played basketball and completely wore out his knees which lead to an artificial knee replacement. Koch joked "that if you had spent as many years as I did begging girls for favors, you'd have bad knees too".

Since David Koch is now retired the question is where his shares go to. There are only a few possible options. The first is the shares could go to his wife. Married couples can pass an unlimited amount of money between one another due to the unlimited martial deduction. This would most likely mean that Julia Koch would become a shareholder of Koch Industries and show up to board meetings. This isn't far fetched since Elaine Marshall (the daughter in law of J. Howard Marshall) is currently shareholder of Koch Industries stock. David Koch did mention in this article that "almost all our money is in Koch Industries. Once we pass, our children will acquire the stock". By we I believe he is referring to him and his wife Julie. His wife Julia is roughly 54 years old and his children: David Jr is near 19 years old, Maria Julia is roughly 16 years old, and youngest son John Mark is around 11 years old. Given these ages the children in the future might be involved in the business.

Another possibility is for other shareholders to purchase the interest of David Koch. However, this seems unlikely has his interest in Koch Industries is worth according to Bloomberg is worth over $47 billion and it would be hard for Charles or the Marshall family to come up with that kind of cash since they both have nearly all their net worth in Koch Industries stock and don't have much liquid.

Sometimes individuals with a high net worth purchase life insurance to cover possible estate taxes. They can even use estate planning tricks buy purchasing life insurance and putting it inside a trust to get it out of the estate so it isn't taxed (known as an ILIT trust). According to a court case back in the early 2000's an insurance agent sold an insurance policy to the Koch family and received a $8 million commission for selling the policy. So perhaps this policy was purchase to cover some estate taxes (given that commission it would be hard to justify that all the estate taxes could be covered). According to this article from an agent that was suppose to sell Charles and David Koch on the insurance policy for every $1 of premium would save $9 in taxes which would mean the policy sold to them would avoid $72 million of estate taxes (which yes is a large sum but wouldn't cover the whole estate tax bill). Also Koch could talk to multiple agents and have different policies in place.

In my own view given that David Koch retired I believed he may be near the end. Individuals who work 12 hours days until they are near 80 years old typically don't leave easily unless they are told they must. The most likely situation is the ownership David Koch owns would be transferred to his wife and then ultimately to his kids (will be easier to transfer if they are in the business). Even if you combined the liquidity of Charles Koch, the Marshall family, and the other shareholders I don't think it would be enough to buy out his $47 billion position. If the Koch family purchased life insurance policies this will certainly help but the issue with insurance premiums is the older you get the more expensive the policy becomes (often times making it uneconomical). There is no doubt the future of Koch Industries and who controls it will be interesting.

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.

Billionaire Charles Koch: Building and Running an Empire

This hour long interview with Charles Koch (interviewed by Peter Robinson) shares how Charles Koch grew Koch Industries over many decades.

MIT Koch Institute Dedication Dinner: David H. Koch

Here is rare video of David Koch at the dedication dinner (back in March 2011). For some reason this video didn't get posted until last year. His brother Charles and wife Julia can be see in the crowd.

Bill Koch Forced To Sell Oxbow Carbon and The Story Behind It

I have been following Bill Koch for a number of years on my blog. My last post regarding him discussed if he was getting forced out of the company he founded and if was running out of money and selling assets to finance his lifestyle. It appears Bill Koch is now being forced to sell his company (that he created after he left Koch Industries and then filed a lawsuit against Charles and David Koch).

Recently, 178 page court decision from Delaware Chancery Court judge Travis Laster ruled that Bill Koch couldn't block Crestview Partners (a private equity firm) from cashing out its investment in Oxbow Carbon. This decision could put the Oxbow Carbon into a receiver supervised sale.

Originally on May 1, 2007 Oxbow executed a deal that would allow Crestview to have a 23% equity interest in Oxbow for $190 million. Oxbow contributed $483 million which represented a 59% interest. In addition to this Bill Koch's family made contributions too. The Wyatt I. Koch 2000 Trust, the William I. Koch Family Trust (created in 1976 to benefit his daughter Charlotte Koch-who is now in her early 20's), even Koch's ex wife Joan Granlund contribute (he at one point in his past tried to juggle three different women at once). Oxbow along with the Koch family owned 67% of equity in the transaction.The Operating Agreement of Oxbow allowed all Koch members to have participation rights with the issuance of new equity. Below is a table that explains the ownership

In January 2011 when Oxbow would acquire a sulfur company the board would approve offering equity to the Koch family and sulfur executives at $300/share (this would represent only a 1.4% interest in Oxbow). Barry Volpert of Crestview would testify that Oxbow didn't need to issue equity to raise capital and didn't help Oxbow to do anything.

The deal would allow Crestview a "put option" to repurchase the remaining shares at fair market market value. This would allow Crestview to sell its shares back to Oxbow. If however, Oxbow declined to purchase the shares then Crestview had the right to have an exit sale of Oxbow. Crestview believed they could sell shares for $283-$452/share in an exit sale and estimated the company would earn $566 million EBITDA (earnings before income taxes and depreciation). Morgan Stanley believed that Oxbow could perform an IPO for $400/share and ultimately trade for $500/share. Oxbow was a pretty successful company earning $571 million in 2011. However, Koch in this video would say that in 2013 his profits were down 40%.

By 2013 Oxbow employee Brian Bilnoski noted that if Oxbow couldn't buyout minority shareholders with debt Oxbow would be at the mercy of the minority shareholders in terms of timing. At the time Bilnoski believed the shares were worth $217/share. In 2014 Koch tried to find new capital to redeem Crestview's interest. Koch had trusted Christine Wing O'Donnell for this task of finding new capital. She is a graduate of Southern Methodist University and Harvard Business School personally worked at a family office for Bill Koch that consisted of over 60 full time employees. O'Donnell would set the strategy for estate planning, investment management, and charitable giving. She would manage the investments, monitor private trust, create family limited partnerships, and would help create a private trust company. Koch even gave Christine full authority to use his private plane-which other Oxbow executives frowned upon.

In 2014 Steve Fried left Oxbow as Chief Operating Officer and Koch replaced the position with Eric Johnson (who at the time was also on the verge of resigning. Eric Johnson  would then be promoted to President (he started the position in 2015-after having been with the company for 11 years) of Oxbow Carbon and actually worked at Koch Industries from 1990-1998. Actually Johnson liked Crestview and even had a "man crush on the Crestview guys". O'Donnell and Eric Johnson along with Crestview Partners didn't believe Bill Koch was the best person to run Oxbow. Bill Koch who has been through many court battles in his time would use surveillance in his own home and within his Oxbow office to capture evidence on Oxbow executives and Crestview Partners. Koch even hired a former FBI agent to engage in private investigation.

By March 2015 Eric Johnson told Crestview Partners that he believed that $18 million could be cut in annual expenses from Oxbow. The cut in expenses would come from cutting back the reimbursements the company was providing to fund Bill Koch's lifestyle. Koch would have Oxbow reimburse him for his $5.3 Dassault Falcon private jet, private school tuition (Oxbridge Academy-a school he founded), entertainment, wine, liquor, even payments to relatives, former employees, and business associates. Most corporations don't allow this as they don't want to allow company funds to be commingled with personal funds.

Realizing that he needed capital to fend off a possible put option or forced sale Koch then wanted O'Donnell to raise capital (but not talk to Crestview). O'Donnell went behind Koch's back and e-mailed, texted, and called Crestview and did not inform Koch on what she was doing. O'Donnell and Johnson would talk to other firms and would tell firms that Koch was willing to transition his role of CEO to Johnson (which he wasn't) and sell equity to give up control (which he wasn't). O'Donnell didn't believe Koch was the best pitch person and felt that bringing him to possible investor meetings would make investors loose enthusiasm. As O'Donnell ran Koch's family office she even offered to have Quenntin Chu personal expenses for Koch. Chu who holds a CFA (Chartered Financial Analyst) designation and became a partner at Crestview in 2012 after starting at the firm in 2005 and graduated from Harvard Business School. Koch picked up that a coup within his own company and by June 2015 told Christina O'Donnell and Eric Johnson they were no longer involved (more on both of their futures at Oxbow later).  By this point Koch was trying to prevent Crestview from exercising their put option. Morgan Stanley recommend that Oxbow in July 2015 would need to raise money immediately and that a if Crestview exercised the put option it would impact the marketability of the shares which would lead to a fire sale of Oxbow Carbon.  During this time Koch would engage in multiple amendments to try to prolong and stall Crestview from exercising their put option.

Well on September 28, 2015 Crestview went ahead and pulled the trigger on their put option and wanted Oxbow to purchase their shares. The appraised value of the shares were only $256.56/share Koch would then hire Goldman (which is interest on many levels because they were brought in for valuations during the Koch vs. Koch trial and they were also the same company that many Crestview partners would come from). Advisors to Koch said he could avoid the put option by taking Oxbow public (brother Charles Koch said Koch Industries would go public literally over his dead body) or merging with another large public company. Also Koch advisors told him the shares were only worth $145/share. Because there was such a difference between Crestview and Oxbow regarding the valuations the agreements stipulated that a third party would have to come in to evaluate the fair market value.

By January 14, 2016 Moelis believed that Oxbow had an enterprise value of $2.65 billion which would  be equal to $169/share. A day after this valuation was determined the Oxbow board would meet to discuss their options. Koch wanted to sue or devise a legal strategy to avoid the forced sale. A day after the Oxbow board meeting Crestview went for the whole enchilada by exercising the exit right sale. By this time Christina O'Donnell also was getting fed up with Koch and even sent an e-mail to Eric Johnson stating they should "take his company from him quickly, not a day of relief, put him through the hell he put [them] through, let's find the $30 million of cost savings if he's not running it..."Let's take his plane, his job, and when it's over drink his wine before you taking me dancing". At this point Johnson and O'Donnell would try to ambush Koch and worked with Crestview to do so. O'Donnell would meet with other companies and even provided signed confidentiality agreements to Crestview. Well Koch would then learn of these tactics and fired O'Donnell in February 2016 and remove her from the Oxbow board. Koch also fired Oxbow's general counsel Michael McAuliffe as well.  Crestview then came up with a value of Oxbow of $2.4 billion and worked with another firm (ArcLight) to purchase 100% of Oxbow's equity for $176/share with the offering expiring on March 22, 2016.

In April 6, 2015 Oxbow met with Goldman Sachs and the Oxbow board authorized Goldman to proceed with the broad sales process. Koch would attempt to micromanage Goldman and his own Oxbow executives by not allowing them to talk to any potential investors or provide them with any information (including most importantly gossip). Goldman Sachs would say that it was the "most constrained" process they would ever encounter in their long history. Crestview managing director Robert Hurst would say that Koch was paranoid regarding the control of Oxbow. Koch would then tell Oxbow executives to provide a dim future outlook for Oxbow when talking to potential buyers. He even instructed the CFO to tell Oxbow executives to tell certain executives to dampen their forecasts or they would possibly loose their bonuses (at most companies Bill Koch would be fired for ordering this). By June 2016 Koch would fire Eric Johnson just before a board meeting. The best part of the meeting was when Koch told his attorneys to file lawsuits against Crestview and another shareholder (while the meeting was in progress). Potential buyer ArcLight said with an impending lawsuit they would not buy in.

In February 18, 2018 decision from judge Travis Laster approved the possibility of an exit sale of Oxbow. This could leave Oxbow in a position where a receiver is appointed to oversee the process between the two parties. Laster pointed out that Oxbow had taken advantage of unfair gaps and didn't follow certain procedures for covering lapses in the agreements signed. Back in November 2017 Judge Laster even said "Is this likely to end anytime soon?"

On April 10, 2018 the board of directors for Oxbow Carbon LLC proposed a board managed sale for $2.6 billion to comply with the court order to comply with cashing out Crestview Partners and Load Line Capital. This valuation was within the realm of what Crestview and Moleis had came up with when they were evaluating the market value of the company. The next question is what will Bill Koch do after he sells the company that he created? Will he set off into the sunset and work on creating his wild west town? Will he spend more time collecting art and wine? Also questions like how will Bill Koch get health insurance since he probably was covered on a company plan. Perhaps Koch Industries has an opening for him (just kidding).

Charles and David Koch Historical Net Worth from 1984-2018 (Koch Outperformed S&P 500)

Most recently I blogged about David Koch and his billionaire homes and lifestyle. For a number of years I have updated this analysis to show the net worth for Charles and David Koch (beginning back in 1984). The data came from historical articles (Newsbank database), AP, USA Today, and most recently Forbes magazine. 

Forbes ranked Charles and David Koch as each being worth $60 billion. What you can see is a staggering increase in net worth over time. The major source of the growth was after the acquisition of Georgia Pacific (my analysis of that deal here). What you do notice though is although the net worth has increased substantially there is quite some volatility in terms of the the net worth. One way to measure this is standard deviation. The standard deviation from 1984-2018 is roughly 41% for the Koch net worth. To put this in perspective the standard deviation of the Standard & Poor's 500 index is close to 11% (from 1984-2017). This would say that the Koch net worth has been twice as volatile as the stock market. When looking at the return side though the annual compound growth of the Koch net worth is 18%/year while the S&P 500 index (for the same period) was 11%. If you were to compare this on a risk to reward basis (compare the return to the standard deviation) it would say the S&P 500 is a better bet, however the annual difference in the compound growth has made a large difference over time.

If Charles and David Koch said back in 1984 "let's retire and just invest our money in the stock market) they would have invested roughly $375 million each (net worth at the time). Charles in 1984 would have only been 49 years old and David would have been 44 years old. Had those monies been invested in the stock market Charles and David Koch each would have been worth $37 billion each (currently as I write this they are worth $60 billion according to Forbes). This 62% increase represents the reward for the volatility (standard deviation). Also if the Koch brothers had invested those monies in the stock market their dividends would be $680 million (assuming a current 1.86% dividend yield). I estimated that Charles and David Koch each pull in roughly $200 million of dividends per year. Koch Industries has a policy of reinvesting 90% of the earnings back into the company (for capital expenditures, acquisitions, making improvements). According to this article back in 2012 Dave Robertson (President and CEO of Koch Industries) said that Charles Koch "is really focused on the present value of future cash flows, thinking long term". The benefit is the company reinvesting nearly all of the earnings is that the company will continue to grow. The downside is that the cost of growth is not being able to pay out as large of a dividend. Most Fortune 500 companies steadily increase their quarterly dividends to appease shareholders and analysts. However, since Koch Industries is a private company they don't have to disclose their financials. Charles Koch back in this 2006 interview felt "the short term infatuation with quarterly earnings on Wall-Street restricts the earnings potential of Fortune 500 publicly traded companies". Also Koch Industries is much more diversified now than they probably ever been before in their history. Dale Robertson made the comment back in 2012 the company was more diversified at that point than back in 2000 and that a smaller percentage of revenue comes from energy related things (however it is still a significant part of their revenue).

Charles and David Koch has obviously grown Koch Industries to a level they probably never even thought possible. In this 2015 interview Charles Koch said when he first joined Koch Industries he tried to plot out his future success. Koch estimated the growth of Koch Industries out to his retirement and then looking back at his analysis said that in 2013 he exceed his lifetime goal by a 70 fold increase. David Koch in this MSNBC interview said that when he joined the company the revenues were $6 million revenue (when he joined as a salesman in 1970)  and recently the revenues were $2 billion (in 2015) which would be near a 14% annual growth rate. It is quite interesting in terms of the growth story that Koch Industries has had. The question is will it continue after Charles and David Koch are no longer at Koch Industries. 

David Koch Billionaire Lifestyle and Homes Across America

David Koch owns many different homes across the United States. With places in New York, Southampton, Colorado, and Florida he has access to large and furnished homes. This shouldn't come as a surprise to one of the wealthiest individuals in the United States.

In Colorado David owns two homes in Aspen, Colorado (they are actually on the same street).  Both of these homes are owned by trusts homes. Generally people who have multiple residences in different states will do this to avoid probate in multiple states. One trust is the "David H Koch 2003 Trust" and the other is just the "David H Koch Trust". The smaller home is 3 bedrooms, 3 and 1/2 baths and roughly 4,000 square feet in size and was purchased for $1.75 million in December 1991 and currently is appraised at $7.1 million. The larger Colorado home features 5 bedrooms, 7 bathrooms and is 9,600 square feet in size and features a finished basement as well. The larger home was purchased in January 1989 for $1.9 million and currently appraised at $15 million in value (the home was remodeled in 2013). Koch in his bachelor days would open his Aspen home to throw some extravagant New Year's Eve parties that would often hundreds of people for the occasion. In 1993 David invited 800 people for New Year's Eve and Newsweek said it was as one of the top parties to crash. Brother Charles also has a home on the same street in Aspen as well. You would think with three Koch homes on the same street they could rename it Koch Drive at least. Charles purchased the home in 1992 for $2.65 million and was recently appraised for $10.7 million. Charles also has a caretaker apartment as part of his home too.

We can't forget the Palm Beach that Mr. Koch owns in Palm Beach. The property is nicknamed El Sarimento. The 32 room home 16,000 square foot home was purchased from David and Julia Koch in 1998 for $10.5 million. Wife Julia then gave the home a $12 million face lift (which included increasing the number of square feet to 30,000). The 2017 property taxes for his Florida residence was ~$638,000. Here are photos of Julia and David that were published in the home from February 2003. The Koch family has even held fundraisers at the home for cancer.

The New York place (his primary residence) is a 9,000 square foot duplex that occupies the fourth and fifth floors of 740 Park Avenue and was purchased for $18 million. The 18 room duplex was purchased in 2003 and it took one year before the Koch family actually moved in because of lavish remodeling. David even poked fun at his wife and her spending habits for remodeling as "there was no budget and she still managed to go over the budget". In April 2016 there was a fire in the apartment (that started in sauna of another apartment tenant that was above). Koch was forced to move his family to a hotel for interim quarters.

The Park Avenue home was purchased after David Koch and his family moved out of the 1040 Fifth Avenue apartment. In 1995 Koch purchased the former home of Jacqueline Kennedy Onassis for $9.5 million. The 1040 Fifth Avenue 15th floor apartment was 5,300 square feet, 5 bedrooms and 1/2 baths. Here are photos after Julia Koch did some remodeling of the apartment and the sketch plans. The apartment also featured three fireplaces, a conservatory, a library, and two terraces. David was quoted as saying "As much as I love the old Jackie Onassis apartment, it wasn't large enough". Koch sold it for $32 million in 2006. Koch and his family had to move out because the area wasn't large enough for David, his wife Julia, his three children, Julia's mother, and the 3 nannies (7 total people). What is interesting is when Koch first purchased the property (he was still single at the time and not yet married to Julia). Around this time in the mid 1990's David (who at the time was 50) was trying to gain membership into the Southampton Bathing Corporation (an exclusive club) and it was speculated he wouldn't gain membership and wouldn't be let in "until he was more stable and had a family". David and Julia were dating at the time and when David purchased the former Jacqueline Kennedy apartment Julia was referred to as the "mistress" of the apartment.

Speaking of New York we can't forget the Southampton home. This roughly 12,000 square foot home has 7 bedrooms and 9 bathrooms. Given the large property size the Koch family also uses plenty of water. His water bill was $34,500 in 2014. Between 2015 and 2016 Koch used 22.5 million gallons of water (he has been the heaviest water user of water in the county for the past 5 years). What is even more interesting is Koch is head of Koch Membrane group which sells equipment to purify water for companies around the world.

According to Sons of Wichita David in his bachelor days was known for having parties at his 7 bedroom, nine-bathroom South Hampton beach house. Actually back in the day he had 5 different properties in the Hampton's. He would be a gracious host offering guests six different types of champagne and serving two meals (dinner and breakfast). Of course not just anyone could get in. In order to secure the party Koch hired 40 security guards to make sure no riff raft would enter.

It is apparent that David Koch lives well and has different homes all across the country. In the late 1990's, David even had a home in Wichita, Kansas. He has been known to charter a yacht which runs $500,000 per week. David also likes fast cars and was quoted in the late 1980's as having a Ferrari but pointed out he didn't have fifteen. Koch said he would rather give his money to charity versus buying "bigger and better paintings". In his free time he enjoys reading: biographies, historical fiction, military history, taking a private jet with his friends to Africa, the Amazon jungle, and the Himalayas. Speaking of reading, in the early 1980's Koch had a subscription to two dozen magazines (not even including technical trade journals). Also during this time period Koch described that during the weekend he would ski, study pollution control designs at his office, attend parties with a girlfriend.

If you look at what David Koch spends compared to his annual income it is actually quite modest. I blogged on this post how my best estimate as to the dividends that Charles and David Koch each receive is $200 million a year. David pointed out in a 1999 article with M.I.T. that he gave away half his income to charity every year. Assuming this living on $100 million per year before taxes isn't too bad (if you back out taxes (Federal and NY state) it would be roughly $50 million of after tax cash flow to live on).

David Koch has worked hard for a number of years to earn this level of income and have this type of wealth (important to remember his net worth is tied up in an non liquid stock since it is privately traded). Back in this 2014 interview he said that he still gets to the office at 9 A.M. but then stays until 7 P.M. and for him 12 hour days are not unusual. Being the executive vice president of a $115 billion company (revenues) is not a 9-5 job. At 77 years old David Koch is still working and not off retired just hanging out by the beach. This work over many decades has afforded him the opportunity to enjoy the amazing growth of Koch Industries and allowed him a life of luxury.