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.
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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 $270 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.
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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
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Seizing Georgia-Pacific
(2003–2006)