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.

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.

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. 

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.

Koch 2016 Seminar Reading List

So this past week the Koch Brothers had their one of the semi-annual seminar in Colorado this past week (Koch has been holding these seminars since 2003-back then hardly anyone would show up). In previous posts I covered what Charles Koch reads in his bathroom and a list of books that Koch Industries recommends to company employees through their quarterly newsletter Discovery.

Well at the seminar this year a list was obtained of books that Freedom Partners believes their donors should read. Membership to the organization is $100,000 per year. If you are a member you can select which books you want sent to you as well. Below are the books listed along with their links.

A Conflict of Visions Thomas Sowell
A Letter Concerning Toleration John Locke
Abundance Peter Diamandis 
After War Christopher Coyne
America's War for the Greater Middle East Andrew Bacevich
Beyond Politics Randy Simmons 
Bourgeois Equality Deidre McCloskey 
Comandante: Hugo Chavez's Venezuela Rory Carroll
Coming Apart Charles Murray
Crisis and Leviathan Robert Higgs
Free to Choose Milton Friedman
Fueling Freedom: Exposing the Mad War on Energy by Stephen Moore and Kathleen Hartnett White
Going for Broke Michael Tanner
Good Profit Charles Koch
Government Against Itself: Public Union Power and Its Consequences Daniel DiSalvo
Heaven on Earth: The Rise and Fall of Socialism Joshua Muravchik
How Adam Smith Can Change Your Life Russ Roberts (he hosts a weekly podcast called EconTalk)
Human Action Ludwig von Mises
In Pursuit of Happiness and Good Government Charles Murray 
Individualism and Economic Order Friedrich Hayek
Kindly Inquisitors Jonathan Rauch
Knowledge and Decisions Thomas Sowell
Law, Legislation, and Liberty Friedrich Hayek
Man's Search for Meaning Viktor Frankl-this book is currently number one in popular pyschology counseling on Amazon right now as I write this
Meditations for Financial Freedom DeForest Soaries
My Bondage and My Freedom Fredrick Douglas 
On Liberty John Stuart Mill
Our Republican Constitution Randy Barnett
Overruled: The Long War for Control of the U.S. Supreme Court Damon Root
Passing on the Right: Conservative Professors in the Progressive University Jon Shields and Joshua Dunn Sr
Permissionless Innovation Adam Thierer
Red Notice Bill Browder
Restraint Barry Posen
Rise of the Warrior Cop Radley Balko
Superpower:Three Choices for America's Rule in the World Ian Bremmer
The Cultural Revolution Frank Dikotter
The Evolution of Everything Matt Ridley 
The Fatal Conceit Friedrich Hayek
The Intimidation Game Kimberly Strassel
The Law Fredric Bastiat 
The Mystery of Capital Hernando De Soto 
The Myth of the Robber Barrons Burt Folsom Jr
The State of the Union: Essays in Social Criticism Albert Jay Nock
The Tragedy of Liberation Frank Dikotter
The Tyranny of Experts William Easterly
The Voluntaryist Creed Auberon Herbert
Why Wages Rise F.A. Harper

Bill Koch Thrown Out of Oxbow?/Is Bill Koch Running Out Of Money?

Update: Recently in February 2018 a court decision on Oxbow could lead Bill Koch into a forced sale of the company. The post can be read here.

Bill Koch who is usually not the Koch brother that the media follows however is one of the most interesting has recently been in the news for multiple reasons (he is for sure the most flamboyant). The most recent news story from Bloomberg is discusses how Bill Koch actually might be ousted from his own company Oxbow Energy. Bill Koch formed Oxbow in 1983 after he had an all out war with his brothers Charles and David Koch in controlling Koch Industries. Charles Koch and David essentially bought out Bill Koch, Frederick Koch, and other Koch Shareholders at $200/share. The deal after much negotiating was finalized at midnight of June 4, 1983 as I previously covered here. When the whole thing was said and done Bill Koch walked away with $470 million and Frederick Koch walked away with $330 million (Frederick never worked a day at Koch Industries!). As I write this post Forbes has Bill Koch's worth pegged at a little over $2 billion which actually seems a lot however on a compounded basis really is okay. Over a 33 year period this is only a 4% return which is about half of the return the stock market provides. Had Bill Koch stayed a shareholder of Koch Industries he could have done quite well. It should be noted that Koch Industries does have shareholders who are not active members in the day to day business of running Koch Industries (Marshall family).

The latest story from Bloomberg claims that Crestview Partners (private equity firm) is trying to get rid of Bill Koch who is CEO of Oxbow Carbon and Minerals Company. This almost seems like a reversal of history considering Bill Koch tried to get rid of his brother Charles Koch in the 1980's from Koch Industries. Crestview Partners invested some capital and took a minority ownership in Oxbow back in 2007. Under the agreement Crestview had the right for Koch to cash out his position of Oxbow. Bill Koch refused to do this and this would cause all of Oxbow to be placed on the market. When Koch opposed the quick sale it was claimed that Crestview tried to scoop up information on Koch that was not only personal but also tried to leak his business affairs to potential buyers to obviously reduce the value of the business. It should be interesting to see if anything happens with Oxbow Energy.

This leads to the question is Bill Koch running out of money? His net worth as I mentioned above is around $2 billion, however he has been selling assets the past couple of years. Bill Koch has recently been selling assets off perhaps to increase his liquidity/build his haunted town in Colorado. Currently Bill has one of his many homes listed for sale in Colorado. However, it seems as if Mr. Koch is asking too much for it as the original price was $100 million and as I write this article the price has been reduced to $80 million (20% reduction). The home is currently the most expensive home in America. The home sits on 55 acres and the actual home itself is 14,000 square feet (28 bedrooms). Not only is the whole property for sale but you can buy individual pieces of the property (the main parcels can be purchased for between $4 million and $60 million). Brothers David Koch and Charles Koch each purchased homes in Aspen, Colorado for $2.5 million each back in 1992.

Recently also Mr. Koch sold 20,000 bottles of wine for roughly $22 million. Last year Koch put up one of his Gulf Stream Florida properties homes for sale for $3.4 million. The home located at 578 Palm Way was originally on sale for $4.2 million but then had the price reduced 3 times. The home was sold for $2.75 million on February 9, 2016.  The home was only roughly 3,700 square feet with 4 beds and 5 bathrooms. Koch had his teenage daughter Charlotte Koch living in the property (she was one of the children that Koch had during an affair). Bill has not only been selling homes, wine, but has also been selling some of his artwork as well. Last year he sold 2 paintings (a Picasso and Monet) through Sothebys that fetched $100 million. Also late last year Christie's was going auction off some artwork that Bill had with the general theme being the American West. According to Christie's Koch received roughly $17 million for all his lots of artwork.

In 2013, he listed his Cape Cod property for a cool $15 million. The property located at 177 Seapult River Road as over 8,000 square feet. According to Zillow the property was sold for $8.5 million on September 14, 2014 so much less than Bill Koch was asking for. During the negotiations of Koch vs. Koch Bill always seem to put an extremely large premium on his shares.

Speaking of business Bill Koch is in the petroleum coke business which recently has been suffering due to rules from the EPA regulating coal. In this video Koch mentions that he sold 7 power plants businesses in 2000. Also he describes what Oxbow does as gas drilling, buy and resell petroleum coke (a byproduct of refining), process petroleum coke, do business in 100 different countries. Oxbow's sales are about $3-$4 billion compound growth rate 26% per year since 1984 but profits in 2014 were down 40%. Pet coke is used in coal burning power generators, either in power plants, or in the cement, iron, or steel businesses. What is interesting is that Koch Industries is a direct competitor of Oxbow Energy with their own division Koch Carbon (which Bill Koch worked for in the late 1970's however brother Charles Koch kept the file of Koch Carbon which showed it was an erratic money loser in this article).

Bill Koch in the past couple of years has raised a substantial amount of money. He announced years ago that he plans to build a haunted ghost town in Colorado which is covered in great detail here. The town is suppose to be a 19th century for a 10 acre town filled with salons, firehouse, bank, church, theater, a library, even a brothel. Koch intends for the town to be a private getaway for his friends/family (this strikes me as odd since a 19th century town would be one of the last places most people would want to visit).  The cost of the town is unknown but I would imagine Bill Koch is building liquidity to pay for the operating expenses/staff to run a whole town. When I add up the recent art, home, and wine sales of Bill Koch (I estimate he will get around $65 million for the home to be conservative) that this will bring in roughly $215 million total. If his net worth is around $2 billion this would be roughly 10% of his assets are transforming into cash. If Bill Koch has to sell part of his company that would increase his liquidity however reduce his control for Oxbow. Time will tell if Bill Koch is facing a cash shortage. However, there is no question whatever happens will be interesting as there is nothing that is boring that happens to Bill Koch.

What Charles Koch Reads on The Toilet?

Johnathon Karl of ABC News who recently did an interview with Charles Koch took this picture of the books that are locate in Charles Koch's bathroom at his Koch Industries office at the headquarters in Wichita, Kansas. I covered the readings from the Koch Industries own publication of Discovery here. I know Charles Koch is big into innovation so why doesn't he have all of those books on an iPad or Kindle!!

Big Money by Ken Vogel
Scaling Up by Verne Harnish
1920 : The Year That Made The Decade Roar by Eric Burns
The Greatest Hoax by James Inhofe
Coolidge, An American Enigma by Robert Sobel
When Markets Collide by Mohamed El-Erian
Game Changer: How You Can Drive Revenue and Profit Growth with Innovation by A.G. Lafley
Tap Dancing to Work Warren Buffett on Practically Everything by Carol Loomis
Knowledge and Decisions by Thomas Sowell
No Apology by Mitt Romney
Inflated by R. Christopher Whalen
Beirut to Jerusalem by Thomas Friedman
Jack: Straight from the Gut by Jack Welch
Scared to Death from BSE to Global Warming why Scares are Costing Us the Earth by Christopher Booker
Cool It: The Skeptical Environment's Guide to Global Warming by Bjorn Lomborg
Moneyball by Michael Lewis
The Quest Energy, Security, and the Remaking of the Modern World by Daniel Yergin
Against The Gods: The Remarkarkable Story of Risk: By Peter Bernstein
The Amateur by Edward Klein
Up From History: The Life of Booker T. Washington
I Am John Galt by Don Luskin 
The Art of What Works: How Success Really Happens by William Duggan
Ayn Rand Box Set by And Rand
Capitalism at Work by Robert Bradley
The Right to Try: How the Federal Government Prevents Americans from Getting Lifesaving Treatments They Need by Darcy Olsen
The Great Deformation by David Stockman

J Howard Marshall, Anna Nicole Smith, and Koch Industries: The Estate Planning Nightmare

A while back a reporter that talked about a woman who owned the rest of Koch Industries. Right now Charles Koch and David Koch own 84% between them of Koch Industries. I always thought the rest of the ownership was owned by Koch Industries employees (board of directors/employees). However, it looks like Elaine Marshall owns around 15% of Koch Industries which puts her net worth at close to $13 billion as Koch Industries generates roughly $115 billion in revenue (according to Forbes).

Elaine Marshall was married to E. Pierce Marshall who was the son of J.Howard Marshall II (the one married to Anna Nicole Smith). J.Howard Marshall had been a shareholder for 20 years of Koch Industries. According to J. Howard Marshall’s autobiography “Done in Oil” Marshall and Fred Koch (father of Charles and David Koch) had an interest in Great Northern Oil Company which was created in 1954. Fred had founded Wood River Oil and Refining Company in 1940 which was a mid-continent oil company. In 1959 Fred Koch purchased a 35% interest in Great Northern for $5 million. According to Marshall, Fred Koch didn’t have the cash and called up First Chicago bank and Koch asked for a note in order to pay it. Koch must have had a great financial reputation to pull that off in the 1950’s.

Marshall had a 12% interest in Great Northern.  In 1959 Wood River changed its name to Rock Island (which later became Koch Industries after Charles Koch took over). Fred Koch passed away in 1966. Charles Koch had worked at Great Northern in his 20’s and knew the refinery business very well. In 1969 Koch Industries purchased a controlling interest in Great Northern Oil Company. Charles was going to purchase a 40% interest in Great Northern Oil Company but they are asking too much for it. Charles then got the idea to pool his interest along with the interest of Marshall into the holding company of Koch Financial. Charles Koch promised J. Howard Marshall a 30% interest in Koch Financial for Koch Industries. They then purchased Union Oil’s Great Northern Oil Company.

In 1974 Marshall II gave his two sons 4% of Koch Industries stock J.Howard Marshall for estate planning purposes.  He gave his sons the Koch Industries stock claiming they "are the crown jewels, take care of them". By 1980 there was a board room coup for control at Koch Industries. Bill Koch and Fredrick  (brothers of Charles and David Koch) wanted to take the company public. At the time Bill and Fredrick had a 48% ownership in the company and needed more than 50% for control. Freddie and Bill tried to purchase a 4% interest from Pierce Marshall to gain more than a 50% interest. Bill and Fredrick then approached J. Howard Marshall III to purchase his shares.

J. Howard Marshall II sided with Charles and David Koch while Marshall III was aligned with Bill and Freddy Koch. To fight off a corporate takeover by Bill Koch Charles Koch flew to California to convince J. Howard Marshall II to purchase Marshall III’s interest. Marshall II bought his son’s share for $8 million- $208/share (the shares had been gifted to Marshall III over the years). This was a large premium for Koch Industries stock considering the highest previous transaction was $80 per share. Charles Koch had urged the buyout of remaining shareholders. The buyout then lead to a lawsuit from Bill, Fred, and the other shareholders who were bought out.

In 1982 to reduce the cost of probate Marshall put all of his interests in Marshall Associates (a family partnership that held Koch Industries of which he owned 862,535 shares of Koch Industries stock). Marshall liked to use leverage though as he used 505,885 shares of Koch Industries stock as collateral. At the time Koch Industries had 5,850,908 total shares outstanding (Marshall had about a 15% interest in Koch Industries. Marshall was using the dividend income from Koch Industries stock to pay off debt and mostly to finance his lifestyle of giving generously to the ladies in his life. In 1994 Marshall earned about $8 million in dividends from his 15% interest in Koch Industries stock (1995 was a little bit less at only $7 million). This would say that Koch Industries was only paying out a little more than $53 million total in dividends in the mid 1990's when looking at ownership interests which was probably a small payout ratio as Charles Koch directed roughly 90% of the earnings back into the company for expansion.

Marshall had met Lady Walker in 1982 who worked at a strip club. J Howard Marshall would shower Lady Walker with gifts and purchased $1 million of jewels from Harry Winston and Nieman Marcus. He ended up spending $2 million a year on Lady Walker (he would spend $2 million a year on Anna Nicole Smith 10 years later). He tried to pay Lady Walker $1 million a year to handle his public relations (he tried to write this off as a business expense and the IRS said no). To impress her with his wealth J Howard Marshall showed Lady Walker a prospectus of Koch Industries with the front page reading "For Lady/The Crown Jewels". Since Marshall had purchased all these gifts for Lady Walker they are subject to what is known as gift tax (tax Form 709 has to be filed every year with this if the gift is over a certain amount). Marshall had given Lady Walker $12-$14 million in gifts without paying any gift tax on it (Marshall fired his accountant for not being aggressive enough with the IRS).  Failure to file gift tax would cost millions in penalties and fees. Marshall tried to disregard the tax code at all cost (even though he was a Yale trained lawyer).

Marshall had cut out his son Marshall III as a potential beneficiary. The stock was held in a revocable living trust (basically this type of trust avoids probate costs and also is not made public). In 1989, Marshall's first wife Eleanor decided she wanted to increase her charitable giving so she set up a charitable remainder trust. Typically this works by giving a human beneficiary income with the remainder of what is left over going to a charity.

 J. Howard Marshall retained the right to income of the living trust. In October 1991 J. Howard Marshall (who was in his 80’s at the time) met a 24 year old blond haired single divorced mother named Vickie Lynn Smith (Anna Nichole Smith). Anna Nicole Smith who was only 24 (she was a dancer at Gigi's strip club in Houston). What is interesting is because of J Howard Marshall's age he would often go to the strip club during the day and he met Anna Nicole Smith when was working the day shift. Anna Nicole talked about her job so Marshall gave her an envelope with $1,000 cash and told her she didn't need to work. Marshall would then give Anna Nicole Smith $4,000 a month for "consulting fees". Over time he increased these checks to $5,500 per month.  Of course Marshall was contemplating marriage and on Christmas Eve of 1993 a Neiman Marcus employee showed up to the home of Anna Nicole Smith to review jewelry. Over time Marshall purchased a ranch, a home, places in New York, Los Angeles, a Mercedes Benz, and jewelry for Anna Nicole Smith. Not only would these gifts be subject to gift tax but generation skipping tax (GST) due to the age difference (generally if there is more than a 37.5 year age difference in the parties and they are not related then they are subject to generational skipping tax). J Howard Marshall had a creative idea to try to adopt Anna Nicole Smith but his lawyer said that the state of Texas might frown upon that. Marshall and Anna Nicole Smith married on June 27, 1994 (son Pierce Marshall didn't know about the meeting until the day after). At the time of the marriage Marshall was estimated to be worth $500 million. What is interesting is Marshall knew that Anna Nicole had limited intelligence and called her "unteachable". Marshall created a pre-nuptial agreement giving Anna Nicole Smith $100,000 per month for each month married and $5 million if they had a child together (the agreement was 58 pages and Marshall believed that legal documents should be no more than 1 to 2 page). To his credit Marshall never planned on giving Anna Nicole Smith Koch Industries stock. I am sure Charles and David Koch were happy about this. Could you really see a former Playmate being a shareholder of Koch Industries and at board of directors meetings? Although, Marshall didn't want to give Anna Nicole Smith the "crown jewels" he did want to make sure she was financially secure which explains why he would give her monthly payments of $5,500.

Even Charles Koch noticed that Marshall showed strange tendencies during this time period. According to Koch in a 1997 deposition Marshall "tended to get drunk a lot, passed out at one of the shareholder meetings". Charles went on to say that when Marshall got drunk he tended to be pretty foolish.

Marshall however passed on August 4, 1995 at the age of 90. From 1994 to 1995 Koch shares appreciated from $664 million to $780 million. J. Howard Marshall in 1994 transferred $6 million of gifts (including ranch, several houses, cars, jewelry, and a substantial amount of cash) to Anna Nichole Smith. While Marshall and Anna Nicole Smith were dating he would pay her a $4,000-$5,500 per month consulting fee. Because they were not married this amount would be subject to gift tax (if you are married you can give an infinite amount under the marital deduction). When Marshall and Anna Nicole Smith were getting close son Pierce Marshall attempted to shift ownership of Koch Industries around from. This 1999 New York Times article speculated that Anna Nicole Smith (who was only 31 who was a high school drop out) "could become one of the richest women in America". At the time the Marshall family owned 8% of the voting stock for Koch Industries and 16% of the non voting stock. Anna Nichole Smith had issues handling money as in 1996 she filed for bankruptcy (she listed the inheritance from Marshall-who died in the year prior as an asset). Smith had claimed that Marshall promised her half of his $1.6 billion estate. In 1999, a California court awarded Anna Nicole Smith $400 million but then in 2002 a federal court reversed that award. Daniel Fisher of Forbes wrote a good article and timeline of the court cases here. In 2014, a court rule that one of Anna Nicole's children Dannielynn would not inherit the $49 million of the Marshall estate. In essence Koch Industries will not transfer to any new beneficiaries.

The whole J Howard Marshall estate is a very good case study for estate planning. The Marshall family is still one of 9 shareholders of Koch Industries stock. Elaine Marshall and her family still owns about 15% of Koch Industries stock. Bloomberg uncovered Marshall as a billionaire. Bloomberg pegged Marshall's net worth at $13 billion however according to this article a spokesperson said the valuation is inflated. They actually do have a point since Koch Industries is privately owned the valuation is the same as valuing a public company such as Google or Microsoft. Elaine Marshall is 73 years old (younger than Charles Koch). She has two sons one named Preston Marshall (grandsons of J Howard Marshall) who is an oil executive for MarOpCo in Houston. It is said that Preston Marshall is the largest shareholder of Koch Industries outside of Charles and David Koch. Why isn't he on the billionaire list? The other son is E. Pierce Marshall Jr. who works as a Vice President for MarOpCo with his brother and also runs a family office called Elevage Capital Management in Dallas. J. Howard Marshall would be proud as E. Pierce Marshall Jr graduated from Yale Law School in 1995 and received a business degree from Tulane (where he sits on the board)

What is quite interesting is that J. Howard Marshall and Anna Nicole Smith were only married for 14 months and the battle for his estate extended for a mere 20 years.