Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (9 page)

“Boy, that was a magnificent shot,” the industrialist managed to say. Then he collapsed.

“His death threw responsibility for his interests on one of his four sons, Charles,” read Fred’s obituary, two days later, in
The Wichita Eagle
. The claim was accurate, but it understated the reality. In an instant, Charles had hurtled from his father’s protégé to his successor. Now Charles, who had just turned thirty-two, ruled the empire. He was petrified.

Fred had effectively turned the company over to his son a year earlier, but had remained close at hand to provide advice and instruction, even if Charles ignored it. He had been his son’s backstop and sounding board. Now Charles alone held the family’s future in his hands.

The Monday after Fred’s death was clear and temperate. Shortly before 2:30 p.m. mourners gathered in the chapel of the sterile-looking Downing & Lahey Mortuary, a short drive from the Koch family’s home. Friends, family, and business associates packed the pews. Some of Fred’s John Birch Society pals, including Clarence Manion, onetime dean of Notre Dame’s law school and a popular right-wing radio host, traveled from out of town to pay their respects.

“A man of modesty, he was never impressed with flattery,” eulogized Pastor Rang Morgan, of Wichita’s Sharon Baptist Church, at the service. “He used to say to me, ‘Rang, flattery is much like perfume. It’s o.k. to inhale it; but don’t ever swallow it.’ ”

The pastor referred briefly to Fred’s crusade against communism, saying, “I’m sure that Fred Koch had enemies for no man makes such a stand for that which is right as he did, without making enemies along the way.

“One had only to be associated with this man for a short while to know how he felt about his business,” he went on. “He felt that there were no short cuts to success; and that no business could be successful unless there was a total loyalty from all associated with it.”

After their father’s funeral, Bill, Charles, and David boarded a small plane, flew up above the Flint Hills, and scattered their father’s ashes above the rolling acreage of his beloved Spring Creek Ranch.

Later, while setting his father’s affairs in order, Charles unearthed a letter Fred had written on a cold January day in 1936, two months after Charles’s birth and when Frederick was three. He told his sons that they would one day inherit a “large sum” of money and he imparted his wisdom regarding their inheritance:

Despite his words about being “kind and generous to one another,” the terms of the businessman’s will planted the seeds of resentment. Almost a year to the day before he died, Fred had
scrawled his signature on an updated version that excluded Frederick from the same inheritance as his three younger brothers. Fred didn’t leave his eldest son a pauper; he had created two trust funds for him, one in 1961 and the other in 1966. But Fred was determined that he receive nothing more.

Their father removed Frederick from his will, according to Charles, because he had repeatedly stolen from him in the years before his death “and then lied about it when confronted with the evidence.” Frederick lifted traveler’s checks, cash, and an “air travel card” from their dad, Charles said; in one case, he alleged, his older brother forged his signature on their father’s Brooks Brothers charge account.

According to Charles, on the first occasion Fred caught his son stealing, he forgave Frederick. Indeed, Fred included Frederick in a previous version of his will, drafted in June 1966. But later that year, after Fred had created trusts for each of his sons, the industrialist discovered that Frederick had again stolen from him. “The fact that… he in the face of that would steal from him again was the final straw,” Charles said. (“I refute all of Charles’ allegations as a calculated campaign of vilification,” Frederick said. “He who would cast aspersions should be beyond reproach.”)

Frederick learned of his disinheritance when he returned home for Fred’s funeral. His grief-stricken mother—unaware of Frederick’s removal until she read her husband’s will—broke the news to him in the library of the family’s home. Frederick recalled that she asked him not to contest the will and “said that she would never favor one son over the other when it came time for her to write her will and that all her sons would be treated equally.” Deeply embittered, he pressured his mother in the years ahead to make things right. “I have never forgotten your saying, shortly after father died, that you intended to leave me a share in your estate equal to that of my brothers,” he wrote Mary in May 1972. “You asked me at that time not to contest father’s will.” He’d obliged, believing
his mother “would set things straight eventually.” But this had yet to happen. Frederick asked Mary to create a second trust to put him on a more even footing with his younger brothers. Doing so, he said, would “no longer perpetuate an imbalance that reflected father’s unequal affection for his children.”

Mary resisted Frederick’s efforts to extract more money from the family, replying by letter that his father had left him an “adequate” trust. Though he was left out of Fred’s will, Frederick still owned a little more than 14 percent of the stock in his father’s company and 16 percent of the shares in a charitable foundation Fred had established in 1953. Charles, David, and Bill each inherited 20-plus percent stakes in the company (the rest was owned by other family members, including the descendants of L. B. Simmons) and nearly 23 percent apiece of the foundation. Fred left to his wife their property and all of his possessions, including their art collection.

Though they owned an equal share of their father’s company, Charles, David, and Bill were not equals in the family business. Fred anointed Charles as his professional heir. He had control of the company, and he could run it as he pleased. After Fred’s death, a number of the industrialist’s friends counseled Charles to sell his father’s corporate assets, believing there was a good market for them. At the time Fred’s holdings included four ranches; a crude oil gathering and refining business; some minor oil exploration interests; and Koch Engineering Company, the outfit Charles had turned around in the early 1960s, which sold equipment to international oil industry customers.

Charles politely refused those who advised him to sell. “Charles told me that he wasn’t going to do that,” Sterling Varner recalled, “that he’d seen a lot of companies in the second generation disappear. They would either go broke or sell out.… So he set his mind to make this company grow and prosper, and he told me that he was going to devote his life to it.”

Charles remembered: “I was scared, but I also thought we had a lot of opportunities.” He planned to “take the foundation we had, particularly the spirit, the attitude, and the values, and compete with major oil companies—compete with all the major… companies that were in the businesses that we were in.”

Charles had inherited not just the reins of the company, but also his father’s reticent, press-shy nature. The beauty of running a private company, Charles often pointed out, was that you didn’t have to bare your soul to the public and financial regulators, tipping off your competition to your strengths and weaknesses in the process. (“We don’t typically want to broadcast what we’re doing,” he once explained.) But on June 27, 1968, Charles did something that seemed unthinkable: He convened New York City’s financial media for a press conference, where he announced that he planned to consolidate Fred Koch’s business empire and rename the company Koch Industries in his father’s honor. In another first, Charles also unveiled the company’s impressive size. With $250 million in annual sales (roughly $1.7 billion in today’s dollars), it ranked among the largest privately owned companies in America. And it was aggressively growing.

“Our change of corporate identity, and the corporate realignment accompanying this change, symbolize the new thrusts of activity within all divisions and subsidiaries of Koch Industries Inc., which will add at least $30 million in gross sales in 1968,” the executive said.

The following year, Charles engineered one of the most important deals in the company’s history, an acquisition that powered the businessman’s expansion plans for years to come. A decade earlier in 1959, when a 35 percent interest in the Great Northern Oil Company had come on the market, Charles’s father had plunked down nearly $5 million without hesitation. It was a wise investment. The company owned a lucrative 40,000-barrels-per-day refinery, known as Pine Bend, near the Twin Cities. It had easy
access to a steady supply of Canadian crude and little in the way of competition in the upper Midwestern market.

Fred’s investment would ultimately lead to a longstanding relationship between the Koch family and one of its most important business allies, the Marshall clan. J. Howard Marshall II was an oilman and attorney who had cofounded Great Northern in 1954. Fred had gotten to know him during World War II, when Marshall served as chief counsel to the Petroleum Administration for War. (Marshall today is better remembered for his marriage, at age eighty-nine, to
Playboy
playmate and stripper Anna Nicole Smith.) Marshall, whose friendship with Fred solidified when the Wichita businessman bought into Great Northern, owned 16 percent of the company.

In the late 1960s, Union Oil Company of California, owner of a 49 percent stake in Great Northern, was sniffing around for a buyer, and Charles glimpsed an opening to consolidate control. “Charles had all of his father’s ability plus some,” Marshall remembered.

Charles knew the Pine Bend refinery well; he had worked there in his mid-twenties. He approached Marshall with a plan to exchange his Great Northern stock for Koch Industries shares; then, with 51 percent owned by Koch Industries, he acquired Union Oil’s shares for $30.5 million, giving Koch Industries total control of the company.

“I generally do not like partners, but Howard Marshall is an exception,” Charles told the veteran oilman after the stock swap, according to Marshall. In this case, the upside of controlling Pine Bend outweighed the perils of bringing an outsider into the strictly family-owned company. The ideally located refinery was a cash cow—as Koch executives themselves later described it—that fueled subsequent acquisitions.

Charles wanted to branch out beyond the traditional businesses in which his father had operated. “Charles had been pressing for
a long time to get into the chemical business,” Varner recalled. He also positioned the company, which had hewed strictly to the oil business, to enter related sectors including natural gas and gas liquids, such as butane and propane. Before long, Varner said, “we were handling around a fifth of all the propane in the United States.”

The key with all these products was transporting them, so Koch Industries concentrated on building its pipeline and trucking capacity. And the company’s healthy appetite for risk enabled it to beat out competitors vying for access to the product. “We were willing to build a pipeline into a new field without a commitment from the producers as soon as there was any indication it would be economic,” Charles recalled. “Other pipeline companies typically attempted to reduce their risk by requiring a commitment, a reserve study, and a fixed tariff.”

In the years to follow, Koch Industries followed a business model that might have appeared scattershot to outsiders: Koch would move into animal feed and agriculture, highway and tennis court surfaces, and telecommunications. Koch was perceived as an oil company, but Charles viewed the enterprise through a different lens. He made investments based purely on the company’s core capabilities—the ability to transport, process, and trade commodities.

Executives who had worked for his father quickly noticed their differing styles. Fred occasionally allowed sentimentality to influence his business decisions, whereas his son focused relentlessly on profit margins. Fred’s move into ranching—based partly on the natural beauty of the tracts he was buying and his frontier childhood—was one example of this. On one occasion, faced with the decision of buying a ranch that neighbored Beaverhead in Montana, or spending the same amount on an industrial Caterpillar tractor, Fred opted for the tractor, even though he realized that purchasing the land made more business sense. “I have wanted
one of those big tractors all my life, so let’s buy it anyway,” Fred explained.

Faced with the same choice, Charles would have made a different calculation, though he did have a certain soft spot for the ranches where he had toiled during his youth. On a few occasions, Charles resolved to sell off the properties, which were less profitable than other businesses Koch Industries was involved in. But in the end, “he always priced them way above the market so they would not sell,” Varner said.

Charles’s business sense wasn’t always on target, and in his first years of running Koch Industries, he occasionally steered the company into blunders. The most memorable occurred in the early 1970s when Koch Industries, following the lead of its competitors in the oil market, gambled big on supertankers. It bought five tankers and chartered a host of others just as the market cratered, leaving Koch on the hook for millions—nearly $500 million, one board member told
Fortune
—as the company scrambled to extricate itself from the collapsing business. All that remained of the disastrous endeavor was the ship’s bell from the
Mary R. Koch
, the tanker Charles had named after his mother, which he later presented to her after the vessel was sold at a huge loss.

Charles’s emphasis on growth and laser-like focus on profit were not rooted in a desire to become one of the world’s richest men. The spark that drove him to build his company and keep building it came from a different place. “He doesn’t do it to make money, never has,” said Tony Woodlief, the former Koch Industries management consultant. “It’s always just been a great, big fascinating puzzle. He’s most excited when they’ve solved some problem. ‘Golly, we buy this shipping terminal and start producing this product and holy cow, we now have an international distribution network. That stumped everybody for fifty years and we figured it out.’ That’s what he likes.”