The Life and Passing of David Koch and What Is Next for Koch Industries?

Today (Friday August 23, 2019) it was announced that David Koch passed away at the age of 79 (I saw this first reported by CNBC earlier this morning). David formally retired from Koch Industries last July as he was suffering from health issues. David Koch had been suffering from prostate cancer since 1992. In 1993, after finally entering remissions from Sloan Kettering David decided to celebrate and have a $100,000 fireworks display with an orchestra champagne soiree at his Southampton place. For years David was taking the drug Zytiga for his advanced prostate cancer. Koch explained here how the drug turned his prostate cancer into a more manageable disease.

David started working for Koch Industries as a technical services manager in 1970 and founded the New York office and was only earning $16,000 per year when he started working. He then was promoted to run Koch Engineering in 1979. His last position before he retired from Koch Industries was as an Executive Vice President of Koch Industries were he oversaw the Chemical Technology Group. During David's 48 year tenure the subsidy of Koch Industries purchased more than 50 businesses and during his tenure grew the company by 1,000 fold. The success paid off over time though with the growth of Koch Industries (who had a history of reinvested 90% of their profits back into the business). In 1979 as I covered in this post David was earning a $250,000 salary, a $850,000 bonus, and a $3 million dividend which David would testify in the Koch vs. Koch trial that he thought it was "way more than we deserved". He believed that one of the most important lessons he learned in life was how to be successful. David believed "if you have an undertaking you must prepare thoroughly. Success requires dedicated work, and it is not just a brief spurt. It's a continuous way of life, day after day, week after week, year after year" he would remark back in 1999.

Nearly every week David would fly from New York to Boston and spend 2 days with Koch Membrane Group (in 2008 the company had sales of $110 million). The subsidy of Koch Industries that started with essentially 0 employees now has 5,000 employees. One of the areas that Koch Membrane focused on was turning dirty undrinkable water that might have been left over from a refinery and converting it into drinkable or reusable water. So yes David Koch literally made the world a cleaner place. If you don't believe me read this article where David Koch nerds out on water filtration systems and discusses technology will not only purify water but will do it at a reduced cost.

David was known for working long hours and get to the office starting around 9 A.M. and then stay until 7 P.M. (with 12 hour days not being unusual for him. He also served on 21 different boards (which would be a full time job in itself) and spent about 1/3 of his time on charitable organizations.

During his life Koch was very charitably inclined. He had given away $1.3 billion to charity before he passed away to medical institutions, the arts, cancer research centers, and to the sciences as well. Koch has been an individual who always have been giving away his money as this 1999 MIT article shows he gave away half of his income every year. He personally insured thousands of individuals got the best medical care possible and wanted to make sure people he cared only got the best. Even liberal Lawrence O'Donnell on MSNBC thanked David Koch on air for his generosity.

In his younger days David was quite a bachelor and often times would have up to 3 dates per day as I covered in this post. David always enjoyed having lots of beautiful women around him. His pal John Damgard who was his high school classmate said back in those days David "could afford to pick up the check even in those days, he was 6'5, wore pretty good looking suites, and was interesting". David use to joke that "if you have spent as many years as I did begging girls for favors, you'd have bad knees too".

In  January 1991 friends had set up David and Julia Flesher on a blind date and took her to Le Club on the East Side of New York, and then afterwords they both shook hands and Julia recalled saying "I'm glad I met that man because now I know I never want to go out with him". David would recall that in his younger days "when I was a bachelor I with a different girl every week, people didn't think I was quite legitimate". However, in July 1991 when they ran into each other at a party David introduced himself and Julia had pointed out that they had gone out before. David pulling out his trusty black book said "Oh my God" and she was correct. When David was diagnosed with prostate cancer Julia stuck by him but gave him two options. Either David could be a live husband or a dead bachelor". The couple married on May 26, 1996 at David Koch's home in Southampton Long Island when David was 56 years old and Julia was 33 years old.

On February 1, 1991 David brushed with death as he was aboard an USAir Flight when it collided with a SkyWest plane upon trying to land. David was the only survivor in first class and 35 people passed away on the flight. After this close call with death David dedicated the rest of his life to philanthropy. David would write about the experience and this was published in the New York Times back on March 7, 1991.

He ran for the libertarian party in 1980 as the vice presidential candidate (with Ed Clark on as the front runner) and received 1.1% of the total nationwide vote. Koch personally gave $1 million of his own money to the libertarian party (which I estimated to be around 12.5% of his total income) in 1980. During the 1980 campaign David would go across the country visiting different cities and states to get the word out. The Clark/Koch campaign didn't take limos, slept in private homes, and flew commercial airlines (David would sit in first class 11 years later when he was in a terrible plane crash).  While on the country tour Koch complained when a staffer was driving David around the staffer insisted they drive under the 55 mph speed limit. David was fully aware that the libertarians would not win the nomination however wanted to influence the thinking of Americans in terms of being more open to free markets and individual choice within our own private lives.

For fun David enjoyed taking a private jet with close friends and visiting Africa, the Himalayas, and the Amazon jungle, and would enjoy reading but would say "I'm so darned busy with my business that I don't get to read nearly enough". He would also had a 6 day $100,000 Alaska cruise where he rented a minesweeper that was converted into an excursion ship, and he would charter three helicopter before getting onto the boat. I covered David Koch's lifestyle and homes in this post.

Now that David Koch has passed Koch Industries loses one of its largest shareholders. I estimated that Koch Industries after taxes earns roughly $13 billion per year, which would mean David Koch pulls in close to $400 million per year in dividends. Koch CFO Steve Feilmeir estimated that Koch Industries was worth $12 million when Charles Koch took in over and  grew 7500 times which would put the net worth of Koch Industries at $90 billion and say David Koch is worth close to $40 billion.

In terms of what happens next with Koch Industries should be interesting. David Koch in this 2014 article mentions that "almost all our money is in Koch Industries. Once we pass, our children will acquire the stock". David leaves behind 3 children (David Jr roughly 20, Mary Julia roughly 17, and John Mark roughly 12) who appear they will now be the shareholders of Koch Industries. Of course minors can't posses property or any interest until they reach the age of majority (age of 18 in New York). Even if they were of legal age there would be no rational reason for them to have an interest in the company given they haven't work in the company yet and they are of yet of age to be making decisions shareholders should be making. It is possible that a trustee is named to make decisions for them until they reach a certain age.

Years ago an insurance agent Michael Brown had planned to met with Charles and David Koch to sell them a policy (Brown was unable to make the meeting and lost a $8 million commission as a result). Insurance policies can be used to save on estate taxes. Often times the insurance policy is purchased and placed into an irrevocable life insurance trust and the assets aren't counted as part of the estate put can provide liquidity.

The executor of David Koch's estate has 6 months to pay estate taxes under normal rules however under IRS code section 6166 the Koch family could have up to 14 years to pay estate taxes! Also it is worth pointing out that in addition to federal estate taxes New York state also imposes their own state estate taxes which are about 16% which would add $6 billion to the coffers of New York (assuming no planning has already been done).

David Koch could also gift his shares to a charitable foundation and receive a federal estate charitable deduction and then have the charity sell back his shares to Koch Industries and the charity would get cash as a result. Although, one issue with this would be Koch Industries plows back 90% of their earnings into the company and this would take Koch Industries many years to pay back the charity unless there was planning done ahead of time.

What happens with David's shares of Koch Industries may not be known for years if ever. My prediction though would be his shares are gifted to charity, along with using insurance, and other advanced estate planning concepts to reduce the taxable amount of his estate.

To me David Koch is an American hero who worked hard all his life and helped grow a division of Koch Industries that started out with nothing, gave part of his fortune and advance knowledge for cancer research, tried to get the word out on libertarian principals, wanted to see a society that let individuals make their own decisions when it came to their own pocketbook or the bedroom. David wanted to be remembered as someone "who did his best to make the world a better place and he hopes his wealth will help people long after he passes".

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".

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.

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.

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. 

Case Study: Koch Industries ABKO Deal with Chrysler

Koch Industries today is a diversified company that is involved in oil/gas refining, paper products, technology, even has their own private investment group to evaluate providing capital to companies. Many people may not know but Koch Industries was actually in the car dealership business back in the 1970's. Chrysler back in the late 1970's decided that it wanted to sell Chrysler Realty Corporation. As part of the Koch vs. Koch lawsuit the Chrysler deal is mentioned in the testimony and the summary can be found here. (The photo above is Bill Koch, Charles Koch, and David Koch).

In September 1979 Koch Industries and George Ablah a land developer from Wichita, Kansas formed a partnership called ABKO. George Ablah who was known as a real estate magnate in the Wichita area and known for constructing shopping malls and developing commercial real estate. George knew Charles Koch (who at that time was only 43 years old) and  ABKO Realty was structured to be 50% /50% deal between Ablah and Koch Industries. The name came from from the first two letters of Ablah and well the KO came from a well known oil and company. Charles Koch is known to be a good negotiator and it was even commented that he will negotiate the hyphen in a 50-50 deal. One of the reasons for using the name was a named that could be used in all 50 states. According to Ablah the purpose of the deal was "an opportunity in our eyes to accumulate a lot of real estate in one purchase, and use it as a base to grow". The concept of ABKO was to sell the dealerships that they purchased from Chrysler realty, reduce the overall debt, and then attempt to diversify out of the real estate holdings. ABKO would establish a grade for each property purchased and rate the properties between a grade of A-D to decide which properties to sell and which properties to keep.Actually George was able to start his real estate career when he used the name of Fred Koch of a reference on a bank loan. Charles Koch would refer to Ablah as the second best business partner he ever had (the first was his wife).

The ABKO partnership would allow Koch Industries and George Ablah to purchase Chrysler Realty stock for a cash price of $70 million (after credits) in September 1979. In the late 1970's Chrysler owned 4,730 dealerships throughout the United States and by Chrysler Realty in 1978 earned about $13 million. However by 1979 the Chrysler was in financial trouble and on the verge of bankruptcy needed a $1 billion from the U.S. federal government. What Koch purchased was 556 Chrysler dealerships and 245 leased Chrysler dealerships. The $70 million deal was financed mostly with debt as Koch contributed only $7 million and the remainder of the monies were financed either by Koch Industries financing or from money borrowed from The First National Bank of Chicago. George Ablah personally guaranteed $29 million of the loan in the deal. 

ABKO would trade 26 Chrysler dealerships for an office building called "Blue Hill". Blue Hill was an office building in New York that only had a occupancy rate of 19% (typically buildings with an occupancy rate of less than 80% are in trouble). The swap for the Blue Hill office building was roughly $25 million. Blue Hill later  would be sold by George Ablah in June 1985 for $100 million. Ablah took on more debt from First Chicago and Chemical bank to make massive capital improvements into Blue Hill and increased the occupancy level to the highest it had ever been. Selling Blue Hill would give Ablah a net gain of $29 million. Taking on debt would catch up to George though. In 1992 George and his wife would file for bankruptcy after changes in federal and state tax rules in the 1980's and early 1990's.

By year end 1981 ABKO was showing results. The entity was able to sell 250 dealerships and realized an after tax income of $34 million ($28 million was paid out as a dividend) and paid down a large portion of the debt owed. Realizing that the economic situation had improved by 1981 Chrysler was interested in repurchasing some of the dealerships owned by ABKO. In 1982 Chrysler and ABKO negotiated a purchase price of $119 million. By this time there were 521 dealerships remaining and Chrysler would purchase 336 of the remaining dealerships from ABKO and sign a 15 year lease on 110 dealerships. The rental income that was generated from the 110 properties had been $11.5 million . The early 1980's were good to Koch Industries.  Koch Industries in 1981 had roughly $17 billion in revenue and earn $309 million (a 20% increase from the prior year in earnings). In 1982 Koch Industries would have $309 million in net earnings.

However, by April 1982 George Ablah was getting worried about the future of ABKO due to the controversy between Koch Industries and the lawsuit between the Koch brothers. Ablah in a 7 page memo felt it was hard to do any type of future planning for ABKO due to the lawsuit (he even mentioned he believed he didn't believe William Koch and the other dissenter shareholders liked him). It was at this point that a split up between Koch Industries and ABKO would occur

On September 20, 1982 Ablah and Charles Koch met to discuss the liquidation of ABKO. It was believed that the after-tax value of the company would be worth $90 million (remember the purchase was $70 million).  In addition to this, Blue Hill would be worth another $26 million. These of course were preliminary talks and estimates. Charles felt the Ablah should stay until most of the properties had been sold. Also Charles felt it was too early to come to a final agreement since he felt the evaluation of ABKO wasn't complete. By October 1982 (this would be the month Bill Koch and other dissenter shareholders would file a lawsuit) Koch had finalized a proposed transaction and bought out George Ablah's 50% interest in ABKO for $45 million.

The analysis of the possible deal was completed in early October and then proposed at the October 19, 1982 board of meeting.  Koch board of directors meeting included Charles Koch, David Koch, Sterling Varner, and Howard Marshall III.  A 30 page executive report was created that outlined the proposal, the history of ABKO, and other pertinent financial information.   When taking into account the present value of the properties the executive committee report came up with a value between $84-$89 million. The deal would have Koch Industries purchase Ablah's 50% interest in ABKO for roughly $45 million. In last minute revisions of the deal Koch would give Ablah two airplanes (a Lear and Citation jet debt free-however this would reduce the cash he would receive).

The Koch Industries board approved the deal November 6, 1982 (this would be a Saturday-in this Wichita Eagle article it is discussed how Koch Industries executives were expected would work all day Saturday-even into Saturday night). During that Saturday meeting William Koch would testify that the calculations and the outcome of the ABKO deal weren't obvious from the report provided from the 30 page executive report). William would end up retaining evidence of what Koch Industries was doing by keeping files on meeting notes, exploration maps, and files on 37 different subject matters.William asked older brother Charles what the future plans were and Charles responded that there were no final plans and they would probably sell the "bad" properties and keep the good properties for the income stream and continue to evaluate in the future.

Between 1982-1985 with the economy improving Chrysler was also improving and Chrysler was more interested in the remaining dealerships increased. The stock price of Chrysler increased from $11/share in 1982 to $37/share in 1985. Between 1982-1983 Koch would sell 30 more dealership properties for $30 million. For the 1Q 1983 ABKO (which was under Koch Properties) had annualized cash flow of $2 billion. By early 1984 Koch believed that the remaining properties should be sold for an amount equal to what Koch Industries could earn on other investments (Koch believed this was 8%/after taxes/after debt). In October 1985 Chrysler agreed to purchase 56 properties from ABKO for $110 million (Koch believed the properties were worth $98 million (based on report shown to the Koch Industries board of directors) so asked for $135 million). The $110 million was paid to Koch over a 10 year period using a long term note paying 12%.

This case study is a great example of how Koch Industries evaluates their deal making process. Honestly it was shocking to me how much little equity Koch had in the ABKO deal. Koch's capital contributions were only $7 million out a $70 million deal. $63 million of the deal was either financed by Koch Industries or by banks. The deal overall turned out to be good for Koch Industries and George Ablah. Koch purchased Chrysler Realty stock for $70 million in 1979 and then sold properties over time earning $34 million in after-tax profits in 1982, sold properties for $30 million between 1982-1983 and then selling the remainder of the properties for $110 million in 1985. It is hard to know exactly how much money was made on the deal however it is clear that Koch Industries and George Ablah clearly did well on the ABKO deal. 

Why Koch Industries Will Not Control TIME Magazine

Recently it was rumored that Koch Industries would provide $500 million to Meredith Corporation in a pursuit to take over TIME Magazine. The Meredith Corporation is a media conglomerate that owns various magazines (Shape Magazine, Better Home and Gardens, and even Fit Pregnancy). The Meredith Corporation also owns 17 T.V. stations as well. It has been rumored that Meredith Corporation secured $600 million from a private equity subsidiary of Koch Industries. My guess would be this would originate from the folks at the Koch Equity Development division. According to an article from Chris Leonard the Koch Equity Development group "reports directly to Charles and other senior executives and which operates like a high level think tank, evaluating potential deals, sometimes on a 10 to 15 year horizon".

Historical investments of Koch Equity Development can be seen here. Koch according to a Wall Street Journal article is also in the business of financing small leverage buyouts. Koch even divides out what types of deals they will perform. The company divides acquisitions into four categories. The first is a tuck-in acquisition which allows Koch to purchase a company that will complement an existing Koch company product/platform. The next type of acquisition is the new platform acquisition which targets companies with EBITDA (earnings before income taxes, depreciation, and amortization) of $250 million. Next would be a partnered acquisition where Koch provides equity with other partners (up to a 50% ownership with joint control). The last type of acquisition that Koch will provide is structured investments. In this type of acquisition Koch will will invest $100 million for a minority position (Koch did this with American Greetings back in 2013). American Greetings is the second largest greeting card company in the United States (Hallmark is number one). The company wanted to transition from a publicly traded company to a privately traded company. The deal was funded from contributions of stock from the Weiss family (owners of American Greetings Stock), cash from $240 million of non-voting preferred stock from Koch AG Investment LLC (subsidiary of Koch) along with $600 million of debt financing.

Of course the media has had outcries for Koch Industries from Vanity Fair, the LA Times, The New York Times, and The Nation. What people worry about is that Koch Industries will turn Time Magazine into vehicle for "the Koch brothers" to share their vision of limited government and free markets. People forget that Koch Industries back in 2013 made a run for the Chicago Tribune but then lost interest. What is interesting is that Charles and David Koch appeared in the Time 100 multiple years (2011, 2014, 2015). Vanity Fair points out when Time had a gala David Koch would be dancing and having a good time (the gala was filled with mostly people of different political viewpoints).

Personally I don't believe Koch Industries will take an active role in TIME magazine. To me the $500 million of financing is Koch lending Meredith monies to purchase Time magazine but Koch most likely wouldn't want to get involved with the day to day management. Also given too that Koch has no experience in this area I view the deal has a way to provide financing for a deal while earning a rate of return for Koch.

Charles Koch and "Good Profit" Book Review/Summary

Well October 8, 2015 I looked out on my doorstep and saw a package from Penquin Publishing and was surprised that I received Charles Koch new book "Good Profit". The book had on it uncorrected proof/not for sale on the front cover and the book. Also the copy I received ended up being 250 pages as opposed to the 288 pages for the final version. I have covered Koch Industries for years as I have written about the estate planning/succession planning here and even talked about the daughter (Elizabeth Koch) here. Of course any blog post I have written can be found here. I ordered the book from Amazon back in March 2015 but I guess I got the book earlier then the release date of October 13, 2015.

As soon as I got the book I couldn't put it down. What is nice about the book is that it is written with more of a personal side of Charles Koch and his family. Throughout the book stories, anecdotes, and analogies are used to get across the points Koch tries to make. For instance Koch in his free time likes to read praxeology, golf, work out, and eat heart healthy meals. The book mainly is about how Koch Industries operates and its history (both the good and the bad) is a great look into how Koch Industries truly operates and what Market Based Management (MBM) is truly about which has led Koch Industries to tremendous growth sine 1961. The company in 1961 was valued at $21 million and now in 2015 is valued closer towards $110 million (27 times better than an investment in the S&P 500-assuming dividends were reinvested). The company plans to grow 12% per year for the continual future. During the 2008 recession Koch increased doubled its shareholder equity and increased its workforce by 40%. The book emphasis the five dimensions of MBM which are Vision, Virtue and Talents, Knowledge, Decision Rights, and Incentives.

What I think readers willl find interesting is that Charles Koch didn't begin out as a Libertarian he read the "entire political spectrum from "left" to "right" and everything in between. This means he even read John Maynard Keynes, Karl Marx, and Vladmir Lenin. Two books for Koch that ended up being life changing were Mises Human Action and F.A. Harper's Why Wages Rise.

Charles points out that growing up Frederick Koch (the oldest son) wasn't one for physical labor. Since Fredrick Koch didn't develop a work ethic Fred Koch was harder on Charles Koch making him work at age 6 and made sure work occupied most of his time. Koch writes that even at age 79 he still works 9 hours a day.  His work history started out digging dandelions and then went on to bail hay and milking cows. In high school Charles was working on the ranch fixing fences, digging ditches, shoveling wheat in a grain elevator. Growing up Charles wasn't easy to deal with and attended 8 schools by the time he graduated high school. During his junior year he got thrown out of Culver Military Academy for drinking beer on a train). One summer Koch has so much homework he would wake up in the middle of the night and sight on the shower bench in the communal bathroom to finish it. Charles improved and was accepted into MIT. While at MIT Charles was maintaining a B- average (he was majoring in engineering too/enjoying himself having a social life) when he came home for summer break is dad told Charles that he would only pay for his education if Charles fully applied himself. After this talk Charles improved his grades a full point. After Charles graduated he went to work for Arthur Little were he designed a plant that produced a potent marijuana derivative. It was after father Fred Koch passed away that Charles Koch took the reins at Koch and growing it by leaps and bounds.

The personal side of Charles Koch is somewhat interesting he from an early age was a trouble maker and sometimes got into fights. You can't be an entrepreneur playing follow the leader. Charles once had a heated debate with a girlfriend of David Koch during the 1960's when she was taking views that the government should run people's lives. This girl mentioned that the government should act however the majority wanted. Charles most likely got frustrated and asked her if she was a redhead (knowing David he was probably dating a brunette or blonde) and the majority of the population voted to kill redheads would she be in favor of that. The girl started crying and even cried the next day which Charles still remembers after 50 years when it happened.

When it comes to subsidies Charles Koch is against all forms of corporate subsides. Koch for years has been against ethanol mandates (this actually increases the cost of food for the least advantaged people). Koch dispels the myth that Koch would profit from the Keystone Pipeline. He write that Keystone would increase the cost that Koch pays for crude by $3 per barrel which would lower Koch profits by $260 million per year. However, Koch takes the position that the pipeline in the long run would be better for the economy as a whole even if the company loses money from it.

Charles Koch is open and honest about the successes and failures of Koch Industries. In 1974 Charles Koch and his wife Liz Koch were breaking ground on their first home. During this time Koch Industries had to deal with price controls, the Arab oil crisis worried Charles that Koch Industries would go bankrupt. Charles Koch also discusses the 1996 pipeline leak that killed 2 teenagers Texas. Koch reflects openly and honestly how that incident along with a few others changed the company view about safety. It was after this incident that Koch switched to a 10,000 percent compliance (100% of employees acting in compliance 100% of the time). Koch discusses how the company when it had dramatic growth it had internal fraud issues were employees were setting themselves up as vendors, taking inventory, and receiving kickbacks which Koch quickly shut down.

Overall the book is well written and easy to read and includes a personal side of Charles Koch not seen before-like the 153 death threats he got in 2014. The book discusses how Koch has grown tremendously since the 1960's (Charles didn't simply inherit the company as some might say). The company has grown so much by reinvesting 90% of their earnings back into the company. What is interesting is how Koch Industries despite having 100,000 employees doesn't appear to be bureaucratic and individuals are always asked to challenge and consider continuous improvement which sometimes never occurs at even Fortune 500 companies. Overall the book is a mix of economics, business, behavioral finance, philosophy, and good story telling of business failures. What I enjoyed was Charles Koch is honest about his failures. Koch is apply to apply Market Based Management to every day examples (including the NFL and even how much time he should spend working editing grammar of the book he wrote). The book is really a great book for anyone who wants to try to live there life to their maximum potential.

Koch 2015 Seminar, Charles Koch Washington Post Interview, and "Climate Change"

So over the past few weeks so there has been some Koch news so I thought I would let people know my take on what is going on (after all I believe my blog has more posts about Koch than any other site on the internet).

The semi-annual seminars have been taking place since 2003. With a meeting from August 1-August 3, 2015 with private donors in Dana Point, California at the St. Regis Monarch Beach resort (as I write this rooms start at $655/night) 450 wealth donors (people who have created tremendous value in society) gathered for the semi-annual "Koch Seminar" which was has the title of "Unleashing Our Free Society". Membership fees are around $100,000 per year. Only 9 organizations were invited to the seminar. The conditions were that the media could not interview donors without there permission and had could only take notes pad and paper (very old-school indeed). Although the list of donors are not known this leaked memo from a previous seminar would give you a pretty idea of who would be at the seminar. In the note that Charles Koch sent out to attendees he also attached this 2014 Wall-Street Journal article about William Gladstone who was the 19th century Prime Minster of Britain. Charles Koch said that this current battle is for "the life or death of this country".

The actual text of the speech that Charles gave donors can be found here from Bloomberg. He says that "our mission, as we say, is to unleash our free society and expand opportunity for everyone". He goes on to talk about a free society being a "society that maximizes peace, civility, and well being for everybody". Charles then goes on to discuss how GDP is a bad measure for the economy. This article from FEE does a good job of explaining why GDP is a bad measure for the economy. Charles then goes on to talk about if we can achieve a 4% growth rate we can take the average American from $42,000 per year to $100,000 (just the magic of compound interest).

One area that I think liberals actually agree with the Koch brothers on is criminal justice reform. Even President Obama mentioned the Koch brothers effort on criminal justice saying "You've got to give them credit. You've got to call it like you see it" as this WSJ article discusses. In a recent interview with the Washington Post to the surprise of some people when talking about crime Koch says "to me, if someone is committing a crime, to deal with it to use minimum force necessary to prevent the crime..there has got to be a way to stop that. I mean, I'd let the guy go. No big deal. He's not really hurting-maybe he's avoiding taxes or something, but to end  up in death is outrageous". Perhaps to Charles Koch Black Lives Matter.

In a rare interview with the Washington Post Koch talked about the 2016 election and his views. People claim that the Koch brothers have so much power. This of course is just nonsense. Has a Koch brother ever forced you to pay taxes, stop at a stop sign, or get a permit? The answer to all these questions is obviously no. However, government can force people into doing all of these things since they are truly the ones with power. When asked about seeing a Republican in the White House Charles Koch replies that he is a "classical liberal". The problem is that Republicans do pretty much the same thing as Democrats once in office. The best quote from Charles in the whole interview is when he says "I think the Democrats are taking us down the road of serfdom at 100 miles an hour, and I think Republicans are taking us at 70 miles an hour". He is a big fan of Calvin Coolidge who would make modern day Republicans look like middle of the road candidates. One item that Charles would eliminate is welfare for both the rich (corporate) and poor. Koch then goes on to discuss in this article how the banks are the biggest proponents of corporate welfare.The banks he says "got massive bailouts,virtually free money from the Fed, and regulations that are crushing the smaller banks, the community banks". The Federal Reserve now decides what banks can do now, what products they can offer, and even can decide when a bank pays out a dividend. Of course the largest banks are major contributors to both political parties.

Koch Industries benefits from the fact that U.S. based companies are not allowed to export natural gas overseas to foreign countries where the price is actually much higher than it is here in the U.S. Something that I didn't know was that Koch Industries uses about 4% of the industrial consumption of natural gas (the division in charge of this is Koch Global Supply and Gas-company information can be found here. Currently, natural gas prices are near all time lows. Anyways, Koch benefits and as other liberal bloggers have reported Koch has received millions in corporate subsidies. However, Koch is still for abolishing all corporate subsidies. To be perfectly honest Koch does roughly $115 billion in revenue (profit as I estimated in this blog post is roughly $6-$10 billion/year). Koch could still be profitable without the subsidies. Charles Koch relies on the principal of treating everyone equal (this is a libertarian concept after all).

When asked about climate change Koch admits "well, I mean I believe it's been warming some". He goes on to say though there could be a measurement problem with how the temperature is measured (on ground vs. in the sky).  What he doesn't agree with is that it will be "catastrophic". According to Koch, "there is no evidence of that. they have these models that show it but the models don't work..to be scientific, it has to be testable and refutable". Let's remember that science is not a democracy. Charles also has a couple of masters degrees in engineering from M.I.T. too. The question is whether you want to reduce economic growth for something that may have a very small chance of happening. Charles Koch even had dinner with Bill Gates in which they discussed climate change (for the record Gates who is a big Democrat pointed out that Koch was a "very nice person". I honestly believe that if there was enough evidence to show that there was a large possibility of "climate change" destroying the earth Koch would shift his opinion on the subject. Brother David Koch has said that global warming is actually a positive since extending the growing seasons in the northern hemisphere which will allow more land will be able to produce food. In a breakfast speech that Bill Koch gave to 600 people at the Palm Beach Chamber of Commerce October 17, 2013 said he isn't a believe in global warming and actually believe we could be lead to a mini-ice age. Bill Koch has some science background since he has a PhD in chemical engineering from M.I.T. saying that people who are calling for carbon dioxide emissions are "on acid". He goes on to say the best way to reduce carbon emissions is to plant trees. Koch says that "to get away from carbon dioxide the human race will have to move to another planet".

It appears that the Kochs are being less secretive as they are now allowing the media to attend their events (although some of them complain about the access as reported here). Let's remember that this is a private party and people can either decide to be there or not. On the other side in this recent WSJ article Koch donors are tired of being demonized. Donors recently wrote a letter to the Dallas Morning News describing what the Koch brothers want.

If I were in charge of the seminar I would videotape and record all the sessions to show the public that these people are really not evil and just want to see more freedom and liberty. Part of the reason I don't think the media continues not to like the Koch brothers is because they still see them as secretive.  I personally don't think even some of the crazy liberals would go after 450 individuals who have different beliefs. If there were only 4 donors I might change my view. Part of the reason why I think Koch has been more open recently is the number of death threats, cyber attacks, and name calling that has been going on for years. This transformation was recently talked about by the New York Times here. If I would were advising the Koch brothers I would tell them to continue to be even more open so people can understand their values, beliefs, in order to not distort them which I would think in the long run lead to fewer death threats, cyber attacks, and just fundamental misunderstanding.

Koch "Secret" Meeting Summary of the Transcript of June 2014 Meeting

Well for a while now I have had the Koch transcript from their meeting from June 13, 2014-June 16, 2014 at St. Regis Monarch Bay resort, an agenda of the conference can be found here. It is clear the the people at these meetings are truly dedicated to free markets as the meetings start at 8:45 A.M. and go on until 9 P.M. Some of the meetings included titles like "Saving America: Our Fight to Advance Freedom and Reverse the Country's Decline", and a book discussion with Amity Shales on Calvin Coolidge as the forgotten President, and "Collectivism: Exploring Its Nature and Consequences" by Dr. Victor Davis Hanson. The actual transcript for the meeting fills about 80-90 pages worth of material which is pretty incredible. I have to actually thank Lady Libertine for posting the transcripts on her blog and also providing the audio which can be found here (if you go to the YouTube chanel you can see all of video from the meetings).

Mark Holden Chief Counsel for Koch Industries starts the meeting talking about Democracy Alliance which is the equal on the other political side. Rob McCay heir to Taco Bell fortune, George Soros, Tom Steyer, and Chris Hughes (co-founder of Facebook) are all majors contributors to Democracy Alliance. This is interesting because you generally hear about all the Republican funding even though there is just as much funding on both sides. Mark Holden points out that he will no longer eat at Taco Bell (even though he likes it)  after he learned that McKay was a big supporter of Democracy Alliance. Actually according to Holden, Democrats have 172 groups in the "donor network" which is more than 31 groups within the Republican donor networks. Holden points out if you add in Big Labor (labor unions), Democracy Alliance, PACs, and super PACS, will spend around $2.2 billion (we shall see if this actually happens).

Norman Reimer discusses the criminal justice system and how it is is overly abusive (Charles Koch and Mark Holden wrote this op-ed that was published in Politco discussing the overcriminalization of America). What people on the left forget is that libertarians like Charles and David Koch believe people no matter what race, sex, color, or income should be treated equal in the eyes of the law. Reimer quotes interesting statistics "2.1 million people are in prison..the United States has 5% of the world's population yet 25% of the world's prisons".

Richard Fink who earned a PhD in economics from Rutgers gives a lecture on the current situation of America and how to change this course. Fink starts out by giving some stats on the current debt which currently is $16 trillion however including the present value of the unfunded liabilities is roughly $200 trillion. What Fink stresses is the "middle third" or 30% of voters who don't have any ideological preference. The problem with what "collectivists" do according to Fink is "they take people and tell them that you're a victim and the American dream no longer exists..and if they know anything about psychology and about people who have "victimitis" they are the most depressed, unproductive people. They become depressed, they become addicts, or they become aggressive". He goes on to quote that "90% of alcoholics are not psychologically built. They see their lives as without purpose. Same too with addicts same percentage. 85% of students who attempted suicide said life had [had no] meaning".

Charles Koch is one of the last speakers on the final days. He tries to rally everyone together explaining how the fight for liberty needs more freedom fighters. What many people may not realize is how Charles Koch and his family are at risk (Koch has received hundreds of death threats which he discusses in this article) and David Koch has to have security detail travel seen in this article. Koch Industries according to Charles the company has "10 million malicious hacker attempts on [their] IT systems every month"  What Charles Koch explains that we have two choices for the future of collectivism or freedom. The definition of collectivism to Charles is "based on the belief that people aren't capable of running their own lives, and those in power are capable of running it for them". One great example of this is the war on poverty which since 1954 we have spent $20 trillion. What is even more interesting is that the rate of poverty has virtually been almost unchanged even after spending vast sums of money. Another interesting statistic is that 1 in 3 jobs now require government permission. If you think about it so many professions (doctors, lawyers, accountants, financial planners, dentists, even repair people) have to be certified by some bureaucratic organization saying that they are deemed okay to work with the general public. Also government subsidies like ethanol increase the cost of food about 35% which generally affects the people who generally elect collectivists.

What seems evident is that the presenters at the Koch seminar don't really say anything that is crazy or evil. What is ironic are the people who often say the Koch brothers are evil, want to pollute the planet, and are just old and rich greedy guys are also the same individuals who want to resort to violence which leads to the death threats. Everyone no matter what political side of the spectrum should be treated with respect. Whether or not you agree with them Charles and David Koch are firm believers in individual liberty and trying to get support from individuals to make sure we can continue being free and prosperous. Society can't prosper when you have few producers and everyone else consuming what the producers create. As of January 2015 close to 93 million people were not working. The economically illiterate usually look the unemployment rate. However, the better measure is the labor participation rate which is near the same percentage as it was in the late 1970's (despite the fact that people can now work at home, some employers offer flexible working  hours, and medical care has greatly advanced). What is interesting is that the Koch brothers are attacked for just wanting to get rich and making everyone else poor. However, allowing people to pursue their own interests given their level of capability and talents and allowing them to create value would make everyone better off. By the government requiring permits, certifications, and training (some of which are not needed) makes it financially prohibitive for the people on the lowest rungs of the economic ladder to move up. Not allowing people at the bottom of the economic ladder to improve themselves increases income inequality since they don't have the financial capital, resources, or time to comply with regulation and rules. Charles and David Koch want everyone to succeed which we should find praiseworthy and laudable.

Koch Industries Dividend Analysis: How Much Do Charles and David Koch Earn a Year?

Update: Recently in 2021 I updated this analysis which can be found in this post. 

For a while I have wondered how much Koch Industries pays out in the form of a dividend. I know the company has a history of a low dividend payout as Bill Koch complained in this 1992 Sports Illustrated article that he "had to borrow money to buy a house.. and [he] is one of the wealthiest men in America". Using publicly available data I estimated how much Koch Industries shareholders earn in the form of a dividend.

So there has been no question that Koch Industries has grown dramatically since Charles Koch has taken over. Speaking of Koch Industries growth recently in the Koch Industries newsletter Discovery (archives of the newsletter can be found here) Charles Koch in the last page talks about the growth of Koch Industries over time. Koch Industries has grown 4600 fold since 1961 while the S&P 500 has grown 160 fold over the same period.

Add to this Charles Koch is coming out with a new book on October 13, 2015 called Good Profit: How Creating Value For Others Built One Of  The Most Successful Companies which discusses how "Charles took a company from a $27 million company in 1967 into a company with $110 billion company over many decades". This would say that Koch Industries has increased at a rate of 19%/year since Charles Koch took over which is quite impressive when you consider the stock market over a long period of time has earned roughly 8-9%/year. However, I do remember the current CFO Steve Feilmeier saying in this video that since Charles Koch took over the company has grown about 15% per year. According to this Wichita Eagle article from 1994 (last page) Koch Industries had $177 million in revenue in 1966 (the year before Charles took over). This would say at current revenue Koch Industries has really grown ~15%/year. 

Charles Koch took over Koch Industries after his father Fred Koch passed away in 1967 from heart issues. At the time Koch Industries had some divisions that were barely breaking even. With Charles Koch taking over he grew the company by literally working long hours (according to this Fortune article from 1982 Charles was working 10 hour days) during the week, weekends (he once had a meeting in August 1968 that began at 4 P.M. and ended at midnight) and it was expected that Koch executives were expected to work Saturday and sometimes well into Saturday night-so much for a social life) . What is even more interesting is that Charles Koch is 79 years old and according to this recent article from the Wichita Eagle these days Charles wakes up around 6 A.M. gets to the office by 7 A.M. and then works until 6 P.M. and is in bed by 9 P.M. (brother David Koch told Avenue magazine recently that at the age of 74 he still gets to the office around 9 A.M. and usually leaves by 7 P.M. and 12 hour days are not unusual for him). It is important to keep in mind that many people with this type of money would be on the beach or off vacating somewhere. You can't become a billionaire working 40 hours a week.

All the hard work that David, Charles, and Bill put into Koch Industries during the 1970's and 1980's paid off. In 1979 David and Bill Koch were earning $250,000 working as vice presidents of divisions at Koch Industries. To give you some perspective $250,000 in 1979 dollars would be worth a little over $800,000 in current dollars. In addition to their salary David, Charles, and Bill were earning $3 million a year in dividends (back then-which would today would be $9 million today). In 1978 Bill Koch was earning $1.167 million in salary with $747,000 in dividends. The following year (1979) Bill Koch was earning a salary of $1 million in salary and $1.9 million in dividends. By 1980 Bill Koch was receiving $3.7 million in dividends. Around this time Bill, David, and Charles Koch each owned roughly 20% of Koch Industries stock (Fredrick owned about 14% of the Koch Industries stock, however didn't work at the company). So doing a roughly estimate the total dividends payouts for Koch for 1978, 1979, and 1980 were roughly $3.7 million, $9.5 million, $17.5 million respectively. When Fred Koch passed away in 1967 dividends for all of Koch Industries was $300,000 (according to the book Sons of Wichita) and by the early 1980's was about $28 million. Fredrick Koch complained 1980's here that the dividend that was paying out only 1% (take into account that Fredrick in the early 1980's was earning roughly $4 million didn't even show up to work!

Charles and David Koch however are not the only current shareholders of Koch Industries. Elaine Marshall and the Marshall family own the other roughly 14% of Koch Industries stock. According to This file (a 2007 trust tax return for Elaine Marshall who owns about 15% of Koch Industries stock that she inherited from E. Pierce Marshall-who is the son of J Howard Marshall (the guy who married Anna Nichole Smith) in 2007 had dividends of about $72 million of dividends from various trusts that she had. Koch Industries had $90 billion of revenue in 2006 (according to a book Charles Koch wrote called Market Based Management). What is interesting is that in addition to the dividends are about roughly just $11 million of interest income (so total income received by the Elaine Marshall and family is about $83 million in 2007).The trust earned roughly $413 million between 1996-2006)  Koch Industries regularly reinvests 90% of the earnings back into the company which actually results in a lower short term dividend, however in the long run if you are growing your dividend will also continue to grow.

Daniel Fisher from Forbes estimates that Charles and David Koch could borrow from Koch Industries a $40 billion dividend. Fisher also estimates Koch Industries for 2014 earned roughly $10 billion per year. From 2003-2014 Koch Industries spent $70 billion in capital expenditures and acquisitions. So on an annual basis this is about $5-6 billion per year of re-investing. Since Koch Industries reinvests 90% of their earnings back into the company this would say that Koch earns roughly $6-$7 billion per year. This would say that the annual estimate that the annual earnings is between $6-$10 billion. Of course this amount is before taxes. So take out roughly $3 billion for taxes and it would leave a net profit of about $7 billion.

So assume net profit is about $7 billion and the payout of Koch Industries is about 7% (which matches this article from 1992). Assume 90% of the earnings are reinvested back into the company, 7% of the earnings are paid out as a dividend, and 3% is held for short term liquidity/cash needs. Also assume Elaine Marshall (and the trusts she owns) have continuously held a 15% ownership of Koch Industries stock. This would mean that Elaine Marshall would have about $74 million in dividends (which is very close to her 2007 trust tax estimate showing $72 million of dividends). Charles and David Koch own the other 84% of Koch Industries (assume the other 1% is held by Koch executives/employees).

 If Charles and David Koch each own 42% of the company then if we take $7 billion in net profit x a 7% dividend payout x a 42% ownership interest it could be estimated that Charles and David Koch each pull in about $200 million a year from Koch Industries stock. Forbes has Charles Koch worth $42 billion as of March 2015. According to Bloomberg Billionaires Index Charles Koch is worth roughly about $51 billion (with $1 billion in cash-which would barely cover estate taxes since they are at 40%-Charles would need roughly $20 billion just to cover the estate taxes-I covered Koch estate planning in this post). At any rate if you take $200 million and divide it by say $42 billion that would mean that the dividend yield for Koch Industries is less than .5% which is fairly low compared with other large companies in the S&P 500 (usually these companies have a yield between 2-3%). So in essence Charles and David Koch are trading off a lower dividend payout for higher long-term growth.

This illustrates the result of compound interest. As Koch Industries has grown at roughly 15%/year over a four decade period would mean that every 5 years the company would double in size. Over time this would increase the dividends that are paid out to shareholders. As Koch Industries continues to grow the dividends will grow as well. The billion dollar question is what happens to the ownership of Koch after Charles, David, and Elaine Marshall are no longer around.

Koch Industries (Koch Brothers) Actually Decreases Pollution and Recycles

So I have been following the Koch brothers/Koch Industries for a while. You often hear of many reports about how Koch Industries pollutes and is making the air and water dirty for everyone else to breathe. However, do Charles and David Koch breathe different air then the rest of us?

I have to admit even I thought Koch Industries made pollution a tad worse until I actually looked at some data. I found reports (this link has all years I will refer to) that showed they do indeed reduce their pollution, recycle, and are actually more green than most people think. The latest Koch EHS report from 2014 is here. 

Currently about 90% of Koch facilities are STAR certified. STAR certified is a voluntary program from OSHA that companies voluntary join in order to make their workplaces safer than even OSHA regulations. A better explanation of this program is explained here. Because STAR sites are safer (because of voluntary actions of the company) they are rechecked every 3-5 years instead of every year. OSHA reviews incident rates every year though. However, as we will see Koch through continuous improvement has reduced emissions and made their work environment safer.

From 1997-2006 Flint Hills Resources refinery in Rosemount, Minn (this facility is very large-as I have actually driven past it) decreased emissions of carbon monoxide, nitrogen oxide, and sulfur dioxide by 53%. Also in 2006 criteria air emissions were .07 pounds per barrel of refining capacity, which was 65% less than the industry average of the 50 largest refineries in the country. As of 2012 the Flint Hills Resources in Corpus Christi, Texas went 12 years without a lost-time incident. Even the Obama administration praised Flint Hills Texas facilities. In 2000, a senior EPA official praised Koch because their Koch Petroleum Group agreed to reduced emissions by 60,000 tons annually. 

Koch invests 90% of their earnings back into the company. Much of this is to improve or upgrade existing facilities. In 1999 Koch introduced a low sulfur product six years before federal standards would be mandated. The company spent $200 million at the Pine Bend refinery (which produces low sulfur fuels). At a Koch Mont Belvieu, Texas facility decreased plant flaring by 95% which decreased emissions from 40,000 pounds in 2000 to about 2,000 pounds by 2003. 

People forget Koch Industries has a division that actually purifies water (Koch Membrane-which David Koch is in charge of). Koch Membrane provides drinking water to municipalities which use cartridges to clean out the water and can clean millions of gallons of water every day. In fact Koch's reverse osmosis module removed 99% of total arsenic in order to provide clean water to agencies and municipalities. Is is ironic that critics claim Mr. Koch is polluting the earth when he runs a division that purifies water!

In 1997, Koch Petroleum's refining operations had 45% fewer criteria air emissions that the average amount peer refiners. By 2000, Koch Pipeline transported 650 million barrels of liquids (including crude oil, natural gas, and other chemicals) and only one quart of product even touched the water. Between 1995-2000 Koch operated pipelines were able to reduce their leaks by 92%. In order to run these pipelines Koch spent $33 million in order to build a control center that had a fiber optic cable, customized software, plus a power supply that isn't uninterrupted.  In December 2012 Koch Pipeline and Flint Hills Resources went 8 years without a lost time incident. Speaking of Flint Hills from 1997-2012 the company reduced its emissions by 76% and emissions were 38% lower than peer refiners for 2012. 

Koch Industries is also into recycling between 1999 and 2000 Koch Industries more than 326 tons of material which was a 19% increase.  From 2000-2003 the recycling amount per person increased 29%.

Koch operates in a pretty safe environment.  Koch's Matador Cattle company for many years has operated with no incidents. Koch Aviation which flies about 2,300 hours per year had a four year OSHA recordable injuries in the mid 2000's that was 80% lower than the industry average. John Zink worked more than 4 million hours and 850 consecutive days without an injury resulting in time away from work. John Zink at this time had 700 employees working 1.7 million years annually. In 2006 six Georgia Pacific facilities had more than 1 million hours in each facility without a lost day of work. A Koch Nitrogen facility in Oklahoma recorded 3 years with no lost time injuries. An Invista facility in the Netherlands went 15 years without a lost workday case and Invista site in Brazil went 32 years without a lost time injury! At the same plant from 2003-2011 which makes LYCRA fiber reduced the amount of water used and actually saved enough water to fill 80 million one litter bottles.

To my knowledge Koch no longer explores for oil/gas. The company does refine oil which is turning the crude oil into other byproducts that are used into everyday goods like plastics. Koch just purchased Molex which is a connectors company that makes connectors for iPhone and other electronic devices. The company makes plastics, fibers, refines oil/gas, minerals, fertilizer, sends oil and gas through pipelines, and even does ranching. It seems as if though Koch Industries voluntary invests 90% of their earnings back into the company to make company assets and employees safer. By reinvesting the earnings back into the company Koch increases productivity and reduces lost work time due to accidents. By reducing the amount of waste Koch is able to make more money and use fewer resources. How many people would have guessed that Koch Industries actually reduces pollution and makes the world a greener place?