Koch

"Every Koch business leader was expected to create their own Value Creation Strategy. They needed to look for new companies to buy, new plants to build, and expansion projects for existing plants. This wasn’t exactly new—growth was ingrained in Koch’s DNA from the beginning, when Sterling Varner encouraged his employees to keep their eyes peeled for investment opportunities. But the VCS regimen was different. Business leaders knew that Charles Koch would cut or increase their bonus pay based on the Value Creation Strategies they delivered. Expansion was once applauded; now it would be required."

"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."

"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."

"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."

"Traders on Koch’s floor considered the rest of the world to be a herd, and not a particularly smart herd at that. There was an overwhelming amount of activity in the markets, but seemingly very little insight. When Koch cautiously branched into a new market, the traders were often surprised at how easy it was to make money there with just a little bit of forethought. “We couldn’t believe how the incumbent counterparties couldn’t see the enormous profits that existed in those markets. Even though these were very established markets . . . dominated by the large banks, or large incumbent parties, like insurance companies, et cetera. But they just looked at it fundamentally very different,” one trader said."

"Charles Koch and his lieutenants considered Koch to be an information-gathering machine that built up stores of knowledge that were deeper and sharper than its competitors’."

"supposedly independent subsidiaries and joint ventures. This arrangement allowed Koch to become enormous by swallowing up dozens of smaller companies while shielding it from the full liability of owning each of those companies. If a Koch subsidiary went bankrupt, then Koch would only lose its investment in that subsidiary; it wouldn’t be on the hook for all the debt and outstanding obligations of that subsidiary."

"The company fortified its corporate veil, creating a corporate structure that was even more complex and opaque than before. Koch called its divisions “companies” and treated them like independent entities to make sure the veil was strong. Koch might publicly claim that its various business units had so much autonomy only due to the tenets of Market-Based Management. But the real reason was to avoid liability."

"“Continuous improvement philosophy is a philosophy developed by a man called J. Edward Deming, who is a statistician,” Koch said.II “So he set up a philosophy based on statistics, how companies can improve their competitive position by improving the quality for the customer and your own productivity.” Koch went on for a long time, talking about this guy named Deming, whom Koch seemed to truly admire. Deming’s ideas seemed to revolve around coming up with mathematical models for how to improve a business, and then continually driving workers to make those improvements and hold true to the plan. “This is a long-term program,” Koch said. “As [Deming] puts it: ‘You never get out of this hospital.’ You are going to be working at this forever.”"

"1. The Target Company Had to Be Distressed Koch was only interested in buying companies or assets that had fallen on hard times. Part of the logic behind this was simple: distressed companies were cheaper. They could be purchased at a discount. But the company had to be distressed in the right kind of way. Ideally, the firm should to be distressed because of managerial negligence or poor decision-making. That way, Koch could reverse the poor strategies when it was the owner. The goal was to improve operations and profits at the distressed firm to boost its value. When that happened, Koch could hold on to its new profit-making machine or sell it. 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 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."

"Every Koch business leader was expected to create their own Value Creation Strategy. They needed to look for new companies to buy, new plants to build, and expansion projects for existing plants. This wasn’t exactly new—growth was ingrained in Koch’s DNA from the beginning, when Sterling Varner encouraged his employees to keep their eyes peeled for investment opportunities. But the VCS regimen was different. Business leaders knew that Charles Koch would cut or increase their bonus pay based on the Value Creation Strategies they delivered. Expansion was once applauded; now it would be required."

"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."

"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."

"Charles Koch and his lieutenants considered Koch to be an information-gathering machine that built up stores of knowledge that were deeper and sharper than its competitors’."

"supposedly independent subsidiaries and joint ventures. This arrangement allowed Koch to become enormous by swallowing up dozens of smaller companies while shielding it from the full liability of owning each of those companies. If a Koch subsidiary went bankrupt, then Koch would only lose its investment in that subsidiary; it wouldn’t be on the hook for all the debt and outstanding obligations of that subsidiary."

"The company fortified its corporate veil, creating a corporate structure that was even more complex and opaque than before. Koch called its divisions “companies” and treated them like independent entities to make sure the veil was strong. Koch might publicly claim that its various business units had so much autonomy only due to the tenets of Market-Based Management. But the real reason was to avoid liability."

"Traders on Koch’s floor considered the rest of the world to be a herd, and not a particularly smart herd at that. There was an overwhelming amount of activity in the markets, but seemingly very little insight. When Koch cautiously branched into a new market, the traders were often surprised at how easy it was to make money there with just a little bit of forethought. “We couldn’t believe how the incumbent counterparties couldn’t see the enormous profits that existed in those markets. Even though these were very established markets . . . dominated by the large banks, or large incumbent parties, like insurance companies, et cetera. But they just looked at it fundamentally very different,” one trader said."

"Even as the markets changed, Koch’s unifying strategy remained the same. It would enter the new markets using the advantages of its past: the inside information that it gleaned from its operations."

"Packebush and his colleagues responded to the crisis in a very Koch way—rather than panic, they launched an in-depth study of their situation."