Georgia-Pacific was looking for a way out of this morass, and executives on the fifty-first floor of the Pink Palace believed that one way forward was to sell off some assets, like its pulp mills. Koch’s Corporate Development Board had become a national hub for the private equity firms that trafficked in such deals, so Koch’s team quickly became aware that Georgia-Pacific was looking to unload some of its properties.
On the day that Koch visited Atlanta, Georgia-Pacific’s presentation on its pulp mills was given by a long-time G-P employee named Wesley Jones. He gave them an overview of the pulp business, the cornerstone of which was a massive mill located in Brunswick, Georgia. The mill produced something called “fluff pulp” and was the largest such mill in the world. The term fluff pulp was a little misleading. The factory actually produced giant rolls of compressed wood fiber that looked like paper towel rolls about the size of a car. The rolls were sent to factories around the world that processed the pulp into soft, absorbent material used in diapers and feminine hygiene products. Georgia-Pacific built the Brunswick mill to feed growing demand for fluff pulp in Asia, as a burgeoning middle class in China and India had more money to spend on disposable diapers. But the bet hadn’t paid off yet—exports remained more sluggish than the company would have liked.
After Jones finished his presentation, Hannan began to dissect everything he had just heard with question after question. Hannan asked about Brunswick’s raw material markets. How did the mill procure its trees? What was the market for timber like? Was it volatile? Did the mill buy its wood under long-term contracts or at a spot price? Jones answered the questions gamely, even if it was a little unclear to him why an oil and gas outfit out of Kansas was interested in any of it.
When the questions were finished, the delegation from Koch Industries got up from their seats, exchanged pleasantries, and headed back to Wichita. The biggest expansion in Koch’s history was about to get underway.
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After their trip to the Pink Palace, Hannan and his team agreed to buy Georgia-Pacific’s two major pulp mills. Koch Industries formed a new shell company, called Koch Cellulose LLC, which took possession of the two major pulp mills for $610 million.I
This acquisition would have been among Koch’s biggest in the 1990s, but in 2003 it was just a down payment. Charles Koch favored a trading strategy that he called “experimental discovery.” It entailed making a small bet in a new market and seeing if the bet paid off. Even if a Koch trader lost money on the trade, they gained insight. If they made a profit, the bet could be expanded.
The pulp mill purchase was just one of many experimental discoveries. Almost as soon as the pulp mill deal was closed, Jim Hannan was switched onto a new team. This one examined the assets of a different company, the old-school chemical conglomerate DuPont.
In 2003, DuPont was like Georgia-Pacific in one key way—investors didn’t quite know what to make of DuPont’s unwieldy collection of business divisions. DuPont had a highly profitable biotechnology division, but its earnings were dragged down by some of its old-line chemical plants. DuPont’s management thought it could boost its stock price if it sold some the company’s legacy plants. One division DuPont was keen to unload was one of its oldest and best known: the synthetic materials unit that made products like Lycra and Stainmaster carpet. The synthetic fibers helped make DuPont a household name, but global competition turned Lycra into a commodity, and, like most commodities, it was suffering from booms and busts in the market. Naturally, all of this was attractive to Charles Koch and the Corporate Development Board.
Koch could secure natural gas and oil supplies better than almost anyone in the world, which would shield it from some of the price risks that were hurting DuPont. There was another attractive feature to DuPont that was similar to the Georgia-Pacific deal. Koch had gotten good at running refineries, and many of the skills it learned in that field could be applied equally well to making fluff pulp, Lycra, and Stainmaster carpet. The business involved paying people to sit in large control rooms and monitor machines that process raw, sometimes dangerous materials. At the Brunswick mill, the people in control rooms oversaw towers that dissolved wood pulp and spinning wheels that turned it into rolls of pulp. At the DuPont plants, the people in control rooms oversaw towers that mixed petrochemicals into compounds that could make clothing. Charles Koch believed that the company could do these jobs equally well, while using each new company as a way to branch into new industries.
In November of 2003, Koch agreed to buy DuPont’s synthetic fiber plants for $4.4 billion.II Just as it had done with the Georgia-Pacific pulp mills, Koch Industries installed layers of corporate veil around the project to protect Koch’s investment. It purchased the assets from DuPont by using two shell companies, called KED Fiber Ltd. and KED Fiber LLC. The chemical plants themselves would be housed under a new company, called Invista, that had its own board of directors and nominal independence from Koch Industries. The deal more than doubled the size of Koch Industries’ workforce, adding eighteen thousand employees to Koch’s fifteen thousand.
Hannan was named president of the intermediates business at Invista (“intermediates” in this case meaning chemical products that were used to make synthetic material). This was the first time that Hannan, a finance guy, was put in charge of operations. He oversaw complicated, sometimes dangerous, chemical processing machinery and was responsible for the safety and competence of employees who worked around that machinery. It was a steep learning curve. And the learning curve had to do with a lot more than just overseeing operations.
Over the next two years, Hannan got a front row seat for Koch’s actions as a private equity firm. He would play an instrumental role in “Kochifying” both Invista and Georgia-Pacific, absorbing both firms into the Koch Industries system. Koch managed these new divisions in ways that were both typical of private equity firms, but also iconoclastic. It used common tools of the private equity boom—heavy debt, a strong corporate veil, and deep financial analysis—but it also imposed a vision that was particular to Charles Koch. While Koch pushed down costs in some areas, it also spent billions on its new holdings rather than stripping them for parts, as some firms did.
Invista became a laboratory to impose another key feature of Koch’s operating philosophy: its new, unbending insistence that all Koch operations obey every law and regulation that was applied to them. This strategy emerged from the painful lessons of the 1990s, when Koch Industries had developed a regulatory rap sheet that gave the company a reputation for borderline criminality. And this strategy was particularly vital to the Invista purchase, with which Koch instantly inherited a network of large factories full of dangerous equipment and chemicals. Each factory was a collection of potential federal violations, and Koch was relying on a workforce of strangers to comply with these rules. The Invista workforce was larger than Charles Koch’s entire company, and now he would have to make sure that each and every one of them had his very best interests at heart. It was Hannan’s job, in part, to make sure that this was the case, at least for the division that he oversaw.
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After Koch took over Invista, it placed help-wanted ads in the business press, advertising open positions for compliance attorneys. This is how Koch came to hire a liberal environmental lawyer named David Hoffmann, who lived in Cleveland.