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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.
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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.
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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.