Kochland Page 39
Karen Marx, a logistics manager at Georgia-Pacific’s tissue paper mill outside Savannah, said that managers at the mill used to rush to meet targets at the end of each quarter, speeding up shipments leaving the plant, whether it was necessary or not. “It was always like ‘Let’s get more shipments out the door,’ ” Marx recalled. This ended when Koch took over. Budgets were replaced by “goals,” which were drawn up in an almost hasty manner, taking perhaps one-tenth of the time to produce. The only purpose of the goal was to give Koch executives a rough idea of their cash expenditures for the year. Managers were not pressured to meet the goals. They spent much less time trying to predict the future—and zero time trying to impress stock analysts or outside shareholders.
Charles Koch gained confidence from the pulp mill experiment. He was so confident that just a year after buying the pulp mills, Charles Koch was considering a plan to buy all of Georgia-Pacific outright and take the company private. Koch Industries could apply the same techniques to the entire company: 10,000 percent compliance, targeted investment, and flexible management that didn’t focus on quarterly results.
But Georgia-Pacific wouldn’t come cheap. The company would cost at least three times the $4 billion Koch paid for Invista, and it would require multiple billions of dollars in debt. Charles Koch hated debt. He strove for years to maximize his company’s cash flow, boost its savings, and keep borrowing at a minimum. This is what gave Koch the flexibility to seize opportunities quickly; the company wasn’t hampered by high debt payments.
The private equity business, however, turned this theory on its head. Debt was the lifeblood of the private equity industry and the broader American economy during the 2000s. The theory behind debt-heavy deals was simple, ingenious, and immensely profitable for the very small number of companies that had the ability to exploit it.
To make a debt-fueled deal work, private equity firms hunted for companies that were struggling, but produced a lot of cash. The equity firms then borrowed huge sums of money to take the target company private and then used the cash flow to pay down the debt. The plan was brilliant in its simplicity—the private equity firm borrowed other people’s money, then used other people’s companies to pay that money down. Once the debt was paid down, the private equity firm still owned the company itself. The company had paid down the debt, and the private equity firm got to keep the wealth that remained afterward. Once that happened, the private equity firm could sell off the target company or keep it and reap its annual profits. It was like borrowing money to buy a house, if the house could somehow generate the money to pay off the mortgage. The only way to lose money was a calamitous decline in the value of the business itself, which did occasionally happen. But the odds were stacked in favor of the private equity owners.
A key part of making the whole strategy work, of course, was the creation of a very deep and strong corporate veil. It shielded the private equity firm from catastrophic losses. The debt was loaded onto the target company, and if the company failed, the equity firm only stood to lose the money it had invested—often just a tiny fraction of the purchase price. The losses were contained, shifted, and kept off the balance sheet of investors like Koch Industries.
Koch Industries put this plan into play to make the largest acquisition in its history. First Koch formed a shell company called Koch Forest Products, making an audacious bid to purchase all of Georgia-Pacific for the sum of $21 billion. The purchase would be financed by debt, which would be loaded squarely onto the shoulders of the newly created, privately held Georgia-Pacific company, called Georgia-Pacific Holdings. This new firm was nominally independent. Charles Koch sat on its board of directors, of course, but the board’s very existence fostered the appearance that Georgia-Pacific was a stand-alone company. If things went terribly wrong, the repercussions would go no further than the legal seawall that Koch was building around its new investment.
Georgia-Pacific was already limping along under roughly $8 billion in debt, delaying capital investments so that it could pay off interest payments. Koch Industries loaded an additional $7.5 billion in new debt onto the company. Within the private equity world, this wasn’t irresponsible, but virtuous. “To acquire Georgia-Pacific, we took it deep into debt—to the point where unless performance improved, Georgia-Pacific would be in violation of its loan covenants,” Charles Koch later wrote. Now debt became a virtue rather than a burden, a force that established motivation and self-sacrifice among those who carried it.
Koch Industries announced its plan to take Georgia-Pacific private in mid-November of 2005. The deal made Koch the largest privately held company in the nation.III Koch would be adding fifty-five thousand new employees to its workforce of thirty-three thousand, more than doubling the company in size once again. Jim Hannan was quickly informed that his services were no longer needed at Invista. He would move to Atlanta and help Koch absorb the largest acquisition in its history.
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Koch had learned a lot about corporate takeovers since the disastrous purchase of Purina Mills in the 1990s. Back then, Dean Watson gathered the Purina executives together and informed them that they would subscribe to a new business philosophy. The result was a shouting match and a wave of defections. When Koch bought Georgia-Pacific, it sent an initial landing team of just seventeen employees to Atlanta to take control of the company, Jim Hannan among them. The delegation from Koch Industries represented about 0.001 percent of the total Georgia-Pacific workforce. It was obvious that Koch did not plan to make this a hostile, rapid takeover.
Hannan was joined by a senior member of the Corporate Development Board, Joe Moeller, who had been president of Koch Industries. Moeller assumed the job of chairman and CEO of Georgia-Pacific. His small cadre of Koch employees would set about steering the ship of Georgia-Pacific, and they would do it with a light hand. Most of the senior leaders at Georgia-Pacific were allowed to stay. Wesley Jones, from the Brunswick mill, was promoted from running the pulp division to overseeing operations across the entire company. The Georgia-Pacific team was allowed to remain the Georgia-Pacific team and allowed to retain the bulk of what they considered to be their corporate culture. They did not dress in the Koch uniform of button-down shirts with no tie and possibly a blazer. Koch Industries had never taken such a soft touch with another corporate culture. There was a looseness to the process that was new.
But drastic change came quickly, and it was driven by the force of debt. The executive suites on the fifty-first floor of the Georgia-Pacific tower, which Hannan thought were “too lavish,” were dismantled almost right away. The executives were kicked out of their offices and sent down to the fiftieth floor. The corner office of the previous Georgia-Pacific CEO, A. D. “Pete” Correll, was cleared out and turned into a meeting room. The desk, the furniture, and the art on the walls were replaced with a meeting table surrounded by unremarkable black office chairs. It looked no nicer than any meeting room in any suburban office park in Kansas, although with a nicer view. The executive dining room was emptied out and turned into a meeting space where managers could book events with clients.
Hannan moved to Atlanta and bought a house. Within a year, he was promoted to replace Moeller as the CEO of Georgia-Pacific, directly overseeing the biggest investment that Charles Koch had ever made. He was forty-one years old.
Hannan’s office on the fiftieth floor of the Georgia-Pacific tower was modest but well appointed, with a big desk and a small conference table surrounded by tasteful wooden chairs. He would spend more than a decade as CEO of the company, finding ways to manage Georgia-Pacific in a fashion that spun off enough cash to pay off its debt while also giving his two most important shareholders a satisfactory return on their investment.
In 2016, there was one item in Hannan’s office that told an important story. On the polished wood credenza directly across from Hannan’s desk, he had prominently displayed a paper Dunkin’ Donuts coffee cup. It’s an odd piece of décor. It was cheap, and it was a constant reminde
r of one of Hannan’s biggest business failures. Early in his tenure, Hannan led a $200 million acquisition of a paper company in California called Insulair, which made the Dunkin’ Donuts cup. The cups had special insulation, and Georgia-Pacific planned to sell them to big chains like 7-Eleven. The deal was a flop. It turned out the cups were too expensive for convenience stores, and Insulair was sold off.
Hannan liked to keep that failure at the front of his mind. He could look over and see the cup at any moment when he was on the phone or writing a memo. He cherished the uneasy feeling it created. It kept him on edge, and this was the key to thriving in the private equity economy. The heavy debt required ever-better performance and leaner operations. The pressure to achieve this never stopped. It was transmitted from Charles Koch, to Jim Hannan, to the cadre of executives who worked around him.
Then, perhaps most importantly, it was transmitted down the chains of command to the ground level of Georgia-Pacific. This is where middle-class Americans were making a living during the 2000s. The pressure affected everyone there, on the ground level, even if they didn’t fully understand where it was coming from.
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I. About $73 million of this price was Georgia-Pacific’s debt that Koch assumed with the purchase.
II. It is unclear how much of this sales price was financed by debt and how much in cash, because Koch Industries was not obligated to report that figure. However, in 2009, almost five years after the acquisition, Koch reported that Invista was carrying roughly $2.6 billion in debt. That year, Koch paid down $1.6 billion of that debt.
III. Koch perpetually competed with the food-and-grain-processing giant Cargill for this distinction. Cargill would later overtake Koch in the rankings and remained number one. Koch executives privately said that outside analysts almost always failed to capture Koch Industries’ full size, and erroneously counted Cargill as being larger—which suited Charles Koch just fine.
CHAPTER 16
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The Dawn of the Labor Management System
(2006–2009)
When Koch Industries bought Georgia-Pacific, it inherited a network of giant paper mills and timber operations scattered throughout the mountains and valleys of the Pacific Northwest. The mills in Oregon and Washington were connected by an economic circulatory system of rivers that carried barges full of timber, wood chips, and finished paper products from one location to another. The beating heart of this circulatory system was Georgia-Pacific’s massive warehouse complex in Portland, Oregon. It was here, inside the giant warehouses, that a bitter battle played out over many decades, virtually unnoticed by the outside world. This battle was a microcosm of a larger fight that intensified during the age of private equity in the 2000s. It was a fight waged by the hourly warehouse workers, whose jobs and wages were under relentless attack over decades. The attacks came from successive waves of owners, each one buying the company and then trying to squeeze ever more profits from the region’s mills and warehouses. The battle would culminate after 2006, when Koch Industries bought the warehouses.
A Georgia-Pacific warehouse worker named Steve Hammond was embroiled in this battle for many years. He would leave it broken and defeated, but he didn’t start out that way. In the beginning, back in the late 1970s, Georgia-Pacific’s warehouse was the doorway to a middle-class life for Hammond and hundreds of his coworkers. Over the ensuing decades, the warehouse became something like an economic island: one of the last employers in the region to offer solid work and solid pay for people who didn’t have a college degree. Hammond watched as this island began to sink, slowly and steadily, as workers’ pay, benefits, and job security were stripped away further, year after year. This was the story of America’s low-skilled middle-class workers during the age of private equity.
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The Georgia-Pacific warehouse in Portland is cavernous and filled with the echoes of squealing tires and humming motors from the busy traffic of forklift trucks driving around inside it. The forklifts navigate within mazelike rows of paper products, stacked high into the shadows of the ceiling rafters. The stacks hold crates of paper towels, pallets of napkins, and other products, all of it wrapped in clear plastic to keep it clean in transit. Hammond worked for more than thirty years in the warehouse and came to know almost every inch of the place. The facility was vital to Georgia-Pacific’s operations on the West Coast. Paper products from mills in small towns like Camas and Wauna, Washington, were ferried by barge down the Willamette River to a dock on one side of the warehouse, where the cargo was unloaded and stored. Trucks pulled into large bay doors on the other side of the warehouse, where they were loaded with product to be shipped to spots in Oregon, to California, to Colorado. The busy crews of forklift drivers, who accounted for the vast majority of the warehouse workers, hauled the cargo from the stacks to the waiting trucks. The big warehouse where Hammond worked was operated in tandem with two other Georgia-Pacific warehouses near the river. The three warehouses, along with the mills, had been bought and sold by several corporate owners during Hammond’s tenure. They were eventually purchased by Georgia-Pacific and then by Koch Industries in 2006.
Hammond was hired at the warehouse in 1972, the very same year that Koch’s militant labor union at the Pine Bend refinery fought its losing battle against the company. He was just nineteen years old at the time. Hammond’s parents had just gotten a divorce, and he was kicking around his childhood neighborhood in southeast Portland. It was a neighborhood of modest ranch houses with small yards bordered by sagging chain-link fences. It is fair to say that Hammond didn’t seem destined for greatness at the time. He was hanging out with his friends, smoking dope, drinking beer, and earning about $2.40 an hour working at a small factory that made fence posts. He got a call from the warehouse, then owned by a company called Crown Zellerbach, that changed his life. A woman on the phone was looking for Hammond’s older brother. Hammond said that he wasn’t around, and the woman sounded frustrated. She needed someone to work a shift at a local warehouse that day. “She said, ‘Well, how would you like to start at this place, four o’clock today?’ ” Hammond recalled. He said, “Okay.”
Hammond drove down to Front Avenue, a street that passed through warehouses, oil terminals, and factories along the river. When he arrived at the factory for the first time, he was put to work right away. He learned how to drive a forklift and started working the night shift. He made $5.05 an hour.I This was more money than Hammond’s dad made as a public school teacher with decades of experience. The money was simply amazing, and the jobs were plentiful. Hammond kept coming back.
He and the other warehouse workers were organized under a particularly fierce, energized union with a funny name: the Inlandboatmen’s Union, named after the river barge workers who plied the Columbia and Willamette Rivers. Everyone called it the IBU for short. Hammond had never seen anything like the IBU. On Sundays, the union held an open meeting for its members at the union hall in downtown Portland. About two or three hundred members showed up, and those who hadn’t already been drinking began drinking immediately. The meetings were long and spirited and social, and the sense of solidarity was electric. “You could always count on a good fistfight or something for entertainment, you know,” Hammond recalled.
The union guys tended to give each other nicknames—there was Dodger and Magneto and Gary the Anarchist—and Hammond later earned his own nickname, the Hammer. He wore this nickname uneasily. It must have been a little bit ironic, like calling a very skinny man “Fatty.” Hammond might have been many things, but he didn’t seem like a hammer. He was a quiet guy, with wide brown eyes and delicate features that could only be described as regular. When Hammond imitated someone screaming in anger, he still managed to do it with a whisper. Hammond was congenial and got along with the people he worked with, including the managers and supervisors. He repeatedly described the warehouse as being like a family, and it was clear that he aimed to get along with his relatives as best he could.
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sp; Hammond wasn’t militant. He didn’t have to be. The union took care of that part for him. The union negotiated relentlessly on behalf of its members. It boasted about its past labor disputes during the 1930s, which were characterized by strikes, violence, and intimidation. Using this history as a lever, the union won remarkably generous terms for its workers: a pension plan for their retirement; a health insurance plan with no employee premium payments; generous sick leave and absenteeism policies; great starting pay; and seemingly permanent job security.
“Once you got in there and working—I was working right alongside guys that were schoolteachers and things. It just paid so much better—they’d gotten like a job in the summer, when there was no school, and it paid so good they just stayed,” Hammond recalled. “So we had quite a few guys that were college educated and working in there.” Hammond didn’t want to drive a forklift his entire life. He left the job briefly, tried other things, but then returned in 1981 because of the good pay and benefits. He didn’t leave for another thirty-five years.
In the mid-1980s, Hammond started hanging around with a pretty girl named Carla Hogue. They drank a lot and partied with friends. Then, Carla Hogue got pregnant. In 1985, she and Steve Hammond had a daughter named Sarah. Steve and Carla later got married and had a second child, Stephanie, in 1989. The Hammonds bought a small home in Vancouver, Washington, just north of Portland. They settled there in part because the property was cheaper than in downtown Portland, although it made for a long commute. Their house payment was about $650 a month, a burden that was easy to meet because he and Carla both worked: he at the warehouse and she as a medical assistant.
Life wasn’t easy for the Hammonds. While work was steady at the warehouse, it was also organized along strict lines of hierarchy and seniority put in place by the union. Hammond started at the bottom of this hierarchy when he returned to work in 1981, which meant that he got stuck with night shifts. He worked for twenty years before he earned the seniority to work days. When his daughters were young, Hammond left for work in the afternoon. He got off his shift around one in the morning and drove home, passing the baton to Carla, who left for her job around four thirty. Steve got to bed around two thirty, slept until the girls woke up at six or so, and then took care of them in the mornings. Hammond usually worked seven days a week, volunteering for overtime shifts to earn the extra pay.