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  2. The Deal Had to Be a Long-Term Play

  Koch wasn’t looking to buy and flip companies. The deal needed to make sense over the five-, ten-, or even twenty-year time frame. This played to Koch’s advantage as a private firm. It could hold an asset through the stormy weather of commodities cycles, improving the underlying investments along the way until they were worth much more. This long-term strategy would open the door to a raft of acquisitions that other firms would not consider. Publicly traded firms, and even private hedge funds, looked for deals that showed a return within one to two years. Koch would face far less competition for the deals that paid off over many years later.

  3. The Target Company Had to Fit with Koch’s Core Capabilities

  In the new era, Koch would stick to its knitting. It would expand into new industries only if the new line of business closely resembled something Koch already did. If Koch didn’t know how to do a certain business process better than its competitors, then it would stay out of that business. New acquisitions had to build on Koch’s expertise and had to branch out from the company’s current strength.

  * * *

  The development board eventually decided that the Koch Nitrogen plan fit all three of these criteria. Packebush and his team were given authority to spend hundreds of millions of dollars to execute it, and they did so before their competitors were prepared to act. The timing was perfect. Farmland’s CEO, Bob Terry, was frantically working to dismantle the co-op and put its biggest assets up for sale. He was hoping to get as much money as possible from the fertilizer plants. He was puzzled when he was contacted by a little-known energy company in Wichita.

  * * *

  The delegation from Koch Industries arrived at Farmland’s headquarters building on a mild spring day, March 27, 2003. Farmland’s headquarters were located in a new office tower just north of Kansas City, another relic of the co-op’s recent profits. The Koch team arrived at the appointed time, walking through the glass doors and into the spacious lobby. Koch Industries employees, around this time, wore a uniform of button-down shirts and blazers. They were soft spoken, unfailingly polite, and single-mindedly focused on the task at hand.

  Steve Packebush was with the team, and as he walked through the lobby, he passed by an enormous mural that Farmland had installed on the wall. The mural was itself a piece of history, and a testament to Farmland’s former greatness. It was painted by a student of artist Thomas Hart Benton and was a symbolic history of Farmland’s rise to greatness. The mural also told a story about what was happening in corporate America, and the broader meaning of Farmland’s collapse.

  The mural depicted how Farmland came to be, back in the 1920s. It showed a group of men and women, dressed in Depression-era clothing, sitting next to a tree and a bale of hay. They are watching a pitchman, who waves his arms out to a horizon of fertile fields and a skyline of grain elevators. He is selling them on the promise of a co-op and the prosperity that could be realized by banding together. Just behind him, two men are slouched below a tree, one of them idly chewing a stalk of wheat. These two men are the “skeptics,” doubtful that the co-op structure would work. Over the next seventy-four years, Farmland proved the skeptics wrong. In 2003, the co-op was owned by roughly five hundred thousand farmers. They shared the profits that Farmland generated from more than $12 billion in annual revenue a year. These farmers had a real say in how Farmland conducted business and they shared in its success.

  It would not be entirely fair to consider Packebush one of the “skeptics.” His father, in fact, had been a Farmland owner and member. He wasn’t quick to criticize the co-op model. But he wasn’t going to be sentimental about it, either. The model had failed, at least in Farmland’s case. The American economy in 2003 was a private equity economy. Even up until the 1960s, US companies operated under something that could be called the “managerial theory” of capitalism, meaning that the interests of shareholders took a backseat to the decisions of managers. Even CEOs at big, publicly traded companies did what they thought was best for the long-term health of the firm. The wealth of shareholders was only one factor among many in their decision-making. A typical CEO thought about rewarding employees, supporting the community that their company called home, and reinvesting profits to invent future products. This arrangement fell apart during the 1970s, when price shocks, inflation, and recession meant that public shareholders got a terrible deal for their money. The rate of return on capital was 12 percent in 1965, but only a meager 6 percent by 1979. This malaise laid the groundwork for a revolution in corporate management.

  A group of academics devised a new way to think about corporations, called the “agency theory.” Under this new way of thinking, a company’s CEO wasn’t in the driver’s seat—he or she would simply be the “agent” of the shareholders. The balance of power was flipped. Now the shareholders would have the upper hand, and they would essentially tell the CEO what to do. Within this framework, the CEO’s only real job was maximizing the return for shareholders. Everything else, from employee pay to civic commitments, even long-term company value, took a backseat to maximizing return to the owners.

  The rise of private equity firms intensified this transformation. Private equity firms bought existing companies and ran them in the best interests of the new owners. Between 2000 and 2012, private equity firms would invest a total of $3.4 trillion as they took companies private. More than eighteen thousand companies were thrust into an extreme form of agency-theory management. Labor costs were slashed, headquarters were moved, and expenses were cut across the board.

  Koch Industries had been operating under the agency theory for years—the primary interest of managers was to increase the return on investment for the primary shareholders, Charles and David Koch. Packebush and his team were agents for Koch’s shareholders. They were hoping to buy the most valuable pieces from the wreckage of Farmland and reshape them to deliver the highest profit.

  * * *

  There was a large table inside the conference room at Farmland headquarters. Next to the table, a series of tripods were arranged, each holding a large, poster-sized photo of Farmland’s fertilizer plants. The glossy photos were designed as an enticement, showing off the plants’ big tanks and tall towers. If the Farmland executives believed that the posters might excite more bidding at the auction, they had reason to be disappointed. Only two companies showed up that day: Koch Industries and the Canadian fertilizer company Agrium.

  The delegation from Koch took their seats along one side of the table. The representatives from Agrium sat down on the opposite side of the table, facing Packebush. The teams from Agrium and Koch were joined by Farmland’s lawyers and bankers, who led the auction.

  Agrium was the largest publicly traded nitrogen fertilizer producer in the United States, with about $2.1 billion in annual sales. Agrium was worth billions, so it had the money to spend on Farmland’s plants. But more importantly, buying the plants would have been a good strategic fit for Agrium—it was already the industry leader. Koch was a nobody in the nitrogen business, having been forced to close down its plant in Louisiana when gas prices spiked.

  But Agrium had reason to be a hesitant bidder that day. The glossy photos couldn’t hide the fact that Farmland’s fertilizer plants were losing about $50 million a year. It seemed possible that Agrium was at the table only because Koch Industries had arrived. Koch and Farmland had already announced a preemptive agreement for Koch to buy the facilities. Agrium might very well have showed up just to nip a competitor in the bud.

  Koch had a key advantage over Agrium. Koch’s shareholders could fit around a small kitchen table. The Agrium team had to answer to a multitudinous crowd of shareholders on Wall Street. If they made the wrong decision, Agrium’s stock price could fall within minutes. Farmland’s plants would likely drag down Agrium’s profits for years to come. Charles Koch had come to peace with this fact. Agrium’s shareholders had not.

  Before the auction, Koch had offered Farmland around $2
70 million. Agrium forced Koch to sweeten its bid to just more than $290 million. But Agrium wouldn’t go further than that. After a relatively short and desultory auction, Packebush and his team stood up from the table as victors. The glossy photos of the fertilizer plants were taken down and tossed in a dumpster. Eventually the mural in Farmland’s lobby was disassembled and shipped off to the National Agricultural Center and Hall of Fame, a tourist attraction in Bonner Springs, Kansas. The mural sat behind a velvet rope and was scrutinized as a relic of the long-forgotten past.

  * * *

  After it acquired Farmland’s fertilizer plants, Koch Nitrogen was renamed Koch Fertilizer and moved to a huge office on the fourth floor of Koch’s headquarters tower, just above Charles Koch’s office. Koch instantly started pouring money into the plants. Over the next ten years, it spent roughly $500 million to outfit the plants with new technology while streamlining production. Koch Fertilizer abandoned the co-op sales model and began trading supplies to the highest bidder (rather than giving preference to the farmer-owners) throughout the Corn Belt.

  Koch installed a team of fertilizer traders in the office, including Melissa Beckett, the star trader who’d once specialized in trading megawatt-hours. The traders bought and sold supplies around the globe, learning more about fertilizer markets each day. Within a few years, Koch Fertilizer built a global distribution network. Koch founded a new company, called Koch Energy Services, which bought and sold natural gas supplies to keep the fertilizer plants stocked. The energy traders sat on the fourth floor, just next to their counterparts trading fertilizer.

  Steve Packebush was named CEO of Koch Fertilizer in 2003. Being part of the Koch Nitrogen team had paid off nicely. He lived in a very large house, by Wichita standards, and ran a division that would become one of Koch’s largest and most profitable. It wasn’t bad for a Kansas farm kid with a degree from K-State.

  Shortly after the bankruptcy auction, a former Farmland employee approached Packebush. He said he had something that Packebush might want. It was one of the glossy poster boards that Farmland printed up for the auction. The Farmland employee had fished it out of the dumpster.

  Many years later, that poster hung on the wall in Packebush’s office. He could gaze at it while the traders outside his door haggled for natural gas supplies and bargained over the price of nitrogen in China. As it turned out, the poster, and the fertilizer plants, would be one of the smaller trophies Koch Industries acquired.

  CHAPTER 15

  * * *

  Seizing Georgia-Pacific

  (2003–2006)

  This time the delegation from Koch Industries was dispatched to Atlanta. They arrived at Georgia-Pacific headquarters, one of the largest, most opulent buildings downtown. The Georgia-Pacific tower, at 133 Peachtree Street, rises knifelike into the sky, its sides encased in gleaming red granite that shines in the morning sun. The building projects an image of authority, ego, and power. It would have seemed preposterous, at that moment, that the small team of executives from Wichita would soon take command of the entire building.

  One of the Koch executives on the team was Jim Hannan. Within a few years, he would become Georgia-Pacific’s CEO. On that hot summer morning in 2003, however, Hannan was just a guest. Georgia-Pacific invited the Koch team to its headquarters that day because they hoped Koch Industries might buy a small part of the timber company’s business: a set of struggling pulp mills. It was hardly the kind of deal that would make the newspapers.

  What wasn’t visible to anyone outside Koch at the time was that Jim Hannan and his team were only a very small piece of a much larger machine inside Koch Industries. They were the landing team for Koch’s Corporate Development Board, which was about to execute a series of corporate takeovers worth more than $25 billion. The board was targeting dysfunctions in the market, places where the public was undervaluing assets that Koch could step in and seize. Georgia-Pacific was one of those undervalued assets. The Delaware corporation DuPont was another one. The distorted, short-term thinking on Wall Street had depressed the value of both companies. Koch had the cash on hand to exploit those mistakes. That’s what Jim Hannan and his team were in Atlanta to do that day.

  Hannan, like Steve Packebush, was a prototypical Koch man. He was lean and athletic, with a square jaw and a manner of speech that was utterly earnest, sincere, and laced with unbendable self-confidence. Hannan was educated at a small school, earning a business degree from California State University, East Bay, in Hayward, and worked as an accountant before joining Koch. Then his real education began. He was hired as a finance guy and promoted from division to division, and from job to job. His real training wasn’t in finance per se but in the Koch method of doing business. By 2003, he was a fluent speaker of Market-Based Management. By the time he arrived in Atlanta that day, Hannan had become the chief financial officer of the Koch Minerals division.

  Hannan’s presence in the lobby of Georgia-Pacific’s headquarters was even more bizarre than Koch’s presence at the auction of Farmland’s fertilizer plants a few months earlier. Koch’s interest in Farmland could at least be explained by Koch’s ownership of a fertilizer plant and a few ammonia pipelines. There was absolutely no conceivable reason for Hannan and his team to buy the assets of a timber company that would cost several hundred million dollars. Koch Minerals specialized in trading and shipping petroleum, coal, sulfur, and other dry goods. Koch Industries, as a whole, had zero experience in the wood and paper business. Yet here was a team from Koch, having requested an appointment, and having made it abundantly clear that they were ready and able to spend very serious money if Georgia-Pacific was willing to part with a few of its assets.

  The team from Koch walked into the spacious lobby at the foot of the Georgia-Pacific tower. The lobby was like a spacious, public mall, with a small coffee shop, a convenience store, and hundreds of well-dressed professionals walking in every direction. Georgia-Pacific was one of the world’s largest wood and paper products companies in the world, with about fifty-five thousand employees spread across the country. The firm owned dozens of giant wood, pulp, and paper mills, and reported $20.3 billion in sales in 2003.

  Georgia-Pacific treated the delegation like visiting royalty. The Koch team was scheduled to receive a private investor’s presentation, to be given on the fifty-first floor of the tower, which employees had taken to calling the “Pink Palace” because of its red granite facing.

  The fifty-first floor held an almost mythical status within Georgia-Pacific. The top floor was home to the company’s executive suites and the executive dining room. It was easier to get invited to an exclusive cotillion ball in the old-money neighborhoods of Atlanta than it was to get an invitation to the fifty-first floor. Hannan and his team stepped into a special bank of elevators and were ushered upstairs.

  When they arrived at the top of the tower, the elevator doors opened onto a wide corridor that was a hushed cocoon of luxury. The hallways were lined with lush rugs, and the walls were appointed with oil paintings that evoked America’s frontiersman past. Hannan and his team walked past china cabinets in the hallways, filled with antiques, and then passed through a set of open doors made from thick, richly colored hardwood with large brass knobs embedded in the center, surrounded by brass etchings that looked like oak leaves, radiating outward. The doorway took the Koch team into Georgia-Pacific’s executive dining room, a large solarium with floor-to-ceiling glass walls that looked out over downtown Atlanta. It felt like the dining room of an elite country club, elevated to Olympian heights. The coffee and food were served on fine china.

  Hannan was making mental notes as he looked around at the paintings and china cabinets and other works of art.

  These are too lavish, Hannan thought. He would eventually change all that.

  After some small talk, the Koch team was given a private investor’s presentation about the pulp mills that Georgia-Pacific had put up for sale. The sale, and Koch’s interest in it, stemmed from deep financial problems t
hat were plaguing Georgia-Pacific. The company had been limping along for years, burdened by debt and a motley collection of different business lines it had purchased during a years-long acquisition spree.

  Georgia-Pacific was founded in 1927 and, in its earliest days, was basically just a big lumber yard. The company expanded rapidly over the decades, at one point owning more than six million acres of trees. As American timber companies wiped out the nation’s supply of old-growth timber, Georgia-Pacific was a pioneer in finding replacement products. It figured out how to replace hardwood oak with cheaper material by using special glues to turn soft pine trees into composite products like plywood.

  Over time, Georgia-Pacific became a chemical company and started to resemble an oil refining company. It owned big processing plants and bought raw materials (timber instead of crude oil) that it processed into commodity products (plywood rather than gasoline). The company used its profits to buy out competitors during the 1990s. The company’s ambitions turned out to be its undoing. In 2000, Georgia-Pacific bought a tissue-paper company called Fort James, which itself was the creation of a recent merger between two giant tissue-making companies. At the time of the purchase, Georgia-Pacific was already carrying $6.5 billion in debt. It borrowed another $10 billion to buy Fort James. The theory was that the new Georgia-Pacific would control both the timber business and the paper business, controlling the entire supply chain, from forests to paper plates. But the purchase was so lavish and so surprising that even the buyout enthusiasts on Wall Street were put off. Georgia-Pacific’s stock fell after the deal was announced.