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  “There’s a tremendous focus on growth, okay, from Charles. . . . The whole thing is growth,” recalled Brad Hall, the Wichita State graduate who joined the company in 1975. Hall rose through the ranks to become a business leader by 1995, allowing him to work closely with Charles Koch as more and more acquisitions were being made.

  As it turned out, Hall would spend many years of his life helping clean up the wreckage from those deals. It was wreckage that might have been avoided. “I think Charles got cavalier,” Hall said.

  What resulted was a kind of perpetual motion machine: a company that grew and then cited that growth as justification to grow even faster. One employee, a rising star, would take this philosophy to heart. He was ambitious, smart, and determined to prove his worth to Charles Koch. His name was Dean Watson.

  * * *

  Dean Watson joined Koch Industries in the early 1980s when he was just twenty-two years old, freshly graduated from Kansas State University. He was intense and physically imposing, standing six foot one, or “six foot two in cowboy boots,” as he likes to say. He had sandy red hair and a competitive streak that seemed woven into his muscle fiber. He’d been a star on his high school football team, but an injury kept him from playing in college. When he was sidelined from the football field, Watson found another realm in which he could compete. He discovered that he had a mind for finance and complex systems. He took business and accounting classes, and he excelled.

  After he joined Koch Industries, Watson approached the world of business in the same way he had played sports—with the intensity of a coiled spring. He was a natural leader with a deep and commanding voice and a way of stating his judgments with supreme confidence. Watson could talk for hours about marginal profits and competitive industry dynamics and expansion opportunities. He shifted easily between abstract management concepts and microscopic operating details of anhydrous ammonia pipelines in the Gulf of Mexico. He didn’t tell people that they needed to follow a business plan. He said, “We need to execute violently against what we’ve been asked to go do.” Watson threw himself into his career. Koch was his life. He didn’t know his neighbors because he worked all waking hours at the Tower. And it made him very happy. He was part of something big.

  Watson was fearless, and this might be part of what endeared him to Charles Koch. Watson’s colleagues and peers couldn’t help but notice his particularly close relationship with Charles Koch. Watson dropped into Koch’s office to share ideas and seek his mentor’s advice. If he was walking past Charles Koch’s office, Watson even felt comfortable popping his head in and interrupting the chief executive. On one occasion, Watson did so to talk over some arcane mechanics of oil prices.

  “His door was open, and I knocked on the door and said, ‘Hey, Charles, I’ve been thinking about this,’ ” Watson recalled. “And so we were talking about internal price transferring and the distortion of pricing in the markets . . . and I bet he spent forty minutes with me, [writing] on the back of a sheet of paper, and we were drawing graphs and pictures and philosophizing. I mean, he was very, very open and very kind to me.”

  Watson wasn’t shy about challenging the people around him, but there was something almost disarming about it. It didn’t seem like he was trying to exert his status but was just possessed by an idea. This alone isn’t what propelled Dean Watson to the center of Koch Industries’ growth in the 1990s. What propelled Watson was his track record in the business. He was named president of a relatively obscure division called Koch Fertilizer. In this capacity, he oversaw a fertilizer plant in Louisiana that Koch purchased when another company wanted to unload it cheap. The division also included a pipeline that shipped fertilizer north to farming states like Iowa and Nebraska.

  Running the fertilizer division might have seemed like an insignificant job to people outside of Koch. But Watson knew better. The fertilizer plant was an example of Koch’s strategy for “rapid prototyping,” a phrase that Watson used to describe Koch’s business experiments. Rapid prototyping was the process of trying new ventures on a small scale to see how they worked. It was the method that Koch used to branch out into different industries. Failure would be part of the process, so Koch kept its initial ventures small. Divisions like the fertilizer business were all learning laboratories.

  Koch Industries learned a lot with its fertilizer business. Among other things, the company learned that American agriculture had slowly and quietly turned into a fossil fuel business. This strange fact would launch the largest expansion effort in Koch’s history. It was nothing less than a play to take over a vast portion of America’s food system.

  * * *

  Koch’s fertilizer plant was basically an oil refinery, but instead of transforming crude oil into gasoline, it transformed natural gas into nitrogen-based fertilizer. It might seem odd that crop fertilizers were produced from fossil fuel. The reasons for this were diverse, but they had a lot to do with the industrialization of the American farm.

  During the 1990s, American farmers were producing more food than ever. Barn-sized combines and tractors tilled farms that stretched for thousands of acres. This system was entirely dependent on artificial fertilizers, because even the best, deepest topsoil in the Midwest couldn’t support such massive yields of corn and soybeans year after year. To achieve the megaharvests, farmers applied a mixture of three chemicals to supercharge the soil: potassium, phosphorus, and nitrogen.

  The first two chemicals are mined from the earth, just like coal. But nitrogen is different: there aren’t large deposits of nitrogen underground. Before World War II, farmers had to plant special legume crops to “fix” nitrogen in the soil through special nodules in their roots. This was time consuming and complicated. But in the early 1940s, a pair of German chemists figured out how to produce nitrogen artificially. They invented something called the Haber-Bosch process, which fixed nitrogen inside a refinery using natural gas as the primary input. This was revolutionary. Nitrogen fertilizer became the lifeblood of modern farming.

  Koch’s facility in Louisiana used natural gas to create a nitrogen-rich chemical called anhydrous ammonia. It used the pipelines to ship ammonia north, where farmers applied it to the soil. The fertilizer plant looked very much like an oil refinery; it was a knotted landscape of interweaving pipes and tanks studded with giant cracking towers. And the facility was operated a lot like an oil refinery—Koch Industries was able to apply what it had learned at Pine Bend and Corpus Christi. Dean Watson employed a team of natural gas traders to get him the cheapest possible sources of feedstock, and he used computer models to run the plant at peak efficiency, just as Koch’s refinery managers did.

  The fertilizer business itself was a platform for growth. It was a listening post to learn about all the businesses that the fertilizer business touched. Dean Watson “executed violently” against this task. He met the players in the food industry, and he studied the markets for food and crops. Soon enough, he and others started to see how Koch Industries might compete in the food business.

  The entire food system appeared to be one immense machine that laundered energy from fossil fuels into food calorie energy that humans could eat. At the beginning of the supply chain was the fossil fuel—gasoline used by tractors and natural gas used to make nitrogen fertilizer. The next link of the chain were farmers raising crops and animals, using the fossil fuels as they went. After that came the food processing industry, like the grain mills and slaughterhouses. Finally, there were the grocery stores and restaurants that distributed the final food products. Koch Industries planned to insert itself into every link of this chain. Charles Koch had made his company the single largest purchaser of American crude oil in the span of a decade. Now his company might be able to do the same thing with food.

  Dean Watson was promoted from overseeing Koch’s fertilizer production to overseeing a new division called Koch Agriculture. This division would be the cornerstone of a business plan that was so large in its ambition, so vast in its scope, that nobody ou
tside the company would have believed the plan was real.

  * * *

  Koch Agriculture first branched out into the beef business, and it did so in a way that gave it control from the ranch to the butcher’s counter.

  Koch bought cattle feedlots. Then it developed its own retail brand of beef called Spring Creek Ranch. Dean Watson oversaw a team that worked to develop a system of “identity preservation” that would allow the company to track each cow during its lifespan, allowing it over time to select which cattle had the best-tasting meat. Koch held blind taste tests of the beef it raised. Watson claimed to win nine out of ten times.

  Then Koch studied the grain and feed industries that supplied its feedlots. Watson worked with experts to study European farming methods because wheat farmers in Ukraine were far better at raising more grain on each acre of land than American farmers were. The Europeans had less acreage to work with, forcing them to be more efficient, and Koch learned how to replicate their methods. Koch bought a stake in a genetic engineering company to breed superyielding corn. Koch Agriculture extended into the milling and flour businesses as well. It experimented with building “micro” mills that would be nimbler than the giant mills operated by Archer Daniels Midland and Cargill. Koch worked with a start-up company that developed a “pixie dust” spray preservative that could be applied to pizza crusts, making crusts that did not need to be refrigerated. It experimented with making ethanol gasoline and corn oil.

  There were more abstract initiatives. Koch launched an effort to sell rain insurance to farmers who had no way to offset the risk of heavy rains. To do that, Koch hired a team of PhD statisticians to write formulas that correlated corn harvests with rain events, figuring out what a rain insurance policy should cost. At the same time, Koch’s commodity traders were buying contracts for corn and soybeans, learning more every day about those markets.

  Koch Agriculture was growing rapidly, but Charles Koch was distracted by a different matter. He was busy talking with lawyers in Topeka, where his brother Bill was waging a full-scale legal war against him.

  * * *

  The lawsuit Bill filed in 1985—alleging that Charles Koch underpaid him for his share of the company—had grown into a sprawling legal sinkhole, sucking in dozens of lawyers, judges, clerks, and investigators. The reasons for Bill Koch’s crusade were becoming increasingly hard to decipher. Was it over money? Brotherly competition? The simple desire to avenge his firing?

  If the motivations for this fight were shadowy, then the tactics Bill employed were even darker. The New York Times later uncovered documents showing that Bill Koch hired investigators to pose as journalists and dig up incriminating information on Charles Koch.I One investigator was offered a $25,000 bounty if he could persuade a national newspaper to publish damaging information about Koch Industries. Bill hired detectives to collect trash outside the homes of Koch Industries lawyers and he later bragged to Vanity Fair that he’d hired “an Israeli-trained former marine” named Marc Nezer to run security operations and use surveillance devices like bugs and cameras. Bill Koch’s lengthy interview with Vanity Fair included the kind of excruciatingly personal information Charles Koch did not share with close friends. Bill Koch detailed his therapy sessions and the scars of his childhood. The Wall Street Journal published a front-page story under the headline “Blood Feud.” The first paragraph of the article began, “To hear William Koch tell it, his brother Charles is a liar, a cheater, and a racketeer.”

  During the late 1990s, Charles Koch found himself consumed by the battle against Bill. His company was under attack, his reputation was under attack, and he faced the prospect of paying millions of dollars or more to his brother if he lost the federal lawsuit in Topeka. As these distractions swallowed Charles Koch’s attention, his company was growing faster than ever.

  * * *

  There was a secret group inside Koch Industries dedicated to expanding the company. In the late 1990s, Brad Hall was put in charge of it. This was the small team with the anodyne name of “the corporate development group,” or simply “the development group” as most people called it. It was essentially a small brain trust located inside the executive suite. Very few people outside the company knew it existed. The development group was modeled on a new kind of investment machine that was springing up on Wall Street, called a private equity firm. These firms institutionalized a trend that had started in the 1980s, when investors realized there was more money to be made in buying existing companies than in creating new ones. The eighties and nineties were the era of mergers and acquisitions and so-called leveraged buyouts. Private equity firms borrowed large sums of money to buy companies, sometimes stripping them for parts and selling off their assets. Other times, the companies became a playground for business turnaround artists who swept in, cut jobs, cut pensions, closed money-losing divisions, and then sold the resulting company.

  The development group that Brad Hall oversaw resembled these private equity firms in some ways. But there was a fundamental difference. Koch’s development group had patience. It thought on a timeline of ten or twenty years, not twelve to eighteen months. And, unlike virtually any other private equity firm, Koch’s group had only two shareholders to answer to: Charles and David Koch.

  For these reasons, Koch made acquisitions like nobody else. It tended to rush into markets when others were leaving. It tended to buy companies only when they were distressed and no one else wanted them. Koch was accustomed to the wild volatility of energy markets, so the company knew that most downturns were temporary.

  The development group was the central hub of many spokes. Each major division at Koch Industries had its own development team, looking for acquisitions. Sometimes these teams made the deals on their own; other times they passed them on to Hall’s central group for clearance. Being head of the corporate development group might have seemed like a plum assignment for someone like Hall. It was unfortunate, then, when he discovered that the group was a dysfunctional mess. The development group was bloated. There were too many people across the company looking at too many deals. And these people were not the right kind of people. Koch had begun to stock its ranks with MBA students from the best business schools around the country. Brad Hall spent a lot of his time trying to unteach these kids what they learned at Northwestern University or Harvard. And there was the cultural element as well. Many executives inside Koch Industries saw that a type of freelance culture was growing among the young guns. They were looking out for themselves, not the company.

  Charles Koch was not there to school these new employees. The company had grown too large for that, and he was spending much of his time in closed-door meetings with lawyers to fend off Bill Koch’s latest attacks. The culture inside Koch Industries was beginning to drift. It borrowed some of the worst impulses from Wall Street—a hunger for high-profile deals, a desire for giant personal paydays, short-term thinking—and combined them with Koch Industries’ mandate for growth.

  The Value Creation Strategies were piling up. Brad Hall and his team were trying hard to evaluate them. But the corporate development group could not control the growth. A lot of the decision-making had been pushed out to the smaller development groups in each company division. They were out making acquisitions on their own.

  Koch Agriculture was about the make the biggest, and most disastrous, of them all.

  * * *

  The largest animal feed maker in America was called Purina Mills Inc. In 1997, the company was up for sale. A group of bankers brought the deal to Dean Watson’s attention. With just one acquisition, he could make Koch Agriculture a colossus.

  Purina Mills was based in St. Louis and had been around for more than a century. It was well known for making pet food. Almost everyone with a dog knew about Purina’s products and its famous red-and-white checkered logo. But there was a giant part of Purina that was largely hidden from public view. Over many decades, Purina Mills had become the largest maker of livestock feed in the United States. This was
a particularly vibrant business during the 1990s, thanks to a revolution in the way animals were raised for meat.

  The pig industry was emblematic of this shift. Even up until the 1970s, most pigs were raised in an environment that people would recognize as a farm. Pigs lived in hutches and could walk around outside. Pigs were fed grain that was often grown right on the farm where they lived. When it was time to slaughter the animals, they were loaded onto a truck and driven to a nearby sales barn where slaughterhouses bought the animals based on a competitive market price.

  All of this changed with the advent of the industrial pig farm. The hutches were replaced with vast warehouses that could hold thousands of animals at a time. The warehouses were fitted with automatic feeding and ventilation systems. The local sales barns closed down and were replaced by large-scale farms where farmers raised ten thousand pigs at a time under contract for a company like Tyson Foods. This transformation had an odd side effect: it neatly split American agriculture into two spheres. There were farmers who raised animals in factory barns, and then there were farmers who raised grain to feed them. Purina Mills stepped into this breach as the feed provider of choice, and it made a fortune. The company operated fifty-eight giant feed mills across twenty-four states. In 1996 it sold 5 million tons of grain for $1.2 billion. It was earning gross profits of about $176 million a year.

  But 1996 was a down year for Purina Mills, a time when commodity markets were roiling. Grain prices shot up to record highs and then crashed again. The company lost sales because it had to raise prices sharply. Margins were squeezed. The firm lost $10 million that year. It was the perfect takeover target for Koch Industries. Koch looked at a struggling Purina and saw tremendous potential in the long term. Purina’s national network of feed mills was unmatched. The underlying market structure that Purina served wasn’t going to change at all. When markets rebounded, which they would, Purina could generate huge profits.