Koch: Very Private, and a Lot Bigger

With a $21 billion deal for paper giant Georgia-Pacific, Koch Industries -- led by reclusive brothers Charles and David Koch -- steps into the spotlight

By Michael Arndt

Charles Koch is a CEO who likes to run his family business the old-fashioned way -- secretively and by his own rules. That may be a little harder from now on, given the extended sweep of his company today.

Koch Industries, which Charles Koch (pronounced "coke") took over 38 years ago from his father, company founder Fred Koch, agreed on Nov. 14 to fork over $21 billion in cash and assumed debt for paper giant Georgia-Pacific (GP ). The deal vaults the Wichita (Kan.) conglomerate past Cargill to become the biggest privately held outfit in the U.S., with annual sales of roughly $80 billion and 85,000 employees (see BW Online, 7/16/01, "Georgia-Pacific, King of the Bathroom?").

Charles Koch, 70, and brother David, 65, own the bulk of the company after elbowing out their other brothers, William and Frederick, in 1983. Fifteen years later, the two sets of brothers walked silently past one another in court as William and Frederick lost a lawsuit to extract more money from Charles and David. The billionaires have kept just as quiet since then. "Koch Industries could possibly be the largest and best-managed company that you never heard of," Georgia-Pacific CEO A.D. "Pete" Correll told employees at a get-acquainted meeting with Koch.


  Koch Industries began in 1940 as an oil refiner, and the bulk of its holdings are still in the oil and gas industry. Founding father Fred wasn't only a business tycoon. The MIT-trained engineer was an original member of the anticommunist John Birch Society in 1958. The sons, who also graduated from MIT, inherited his politics. David, who is executive vice-president and a board member, ran for Vice-President on the Libertarian Party ticket in 1980. Both Charles and David are directors of the free-market advocating Cato Institute and Reason Foundation (see BW, 4/1/96, "Bob Dole's Oil-Patch Pals").

Since Charles and David finally brushed aside the last of the lawsuits from their brothers, Koch Industries has been branching out. In 2004, it paid $4.4 billion cash for DuPont's (DD ) synthetic fibers subsidiary, Invista. That acquisition included 18,000 employees, 50 plants around the world, and such brand-name products as Lycra fabrics and Stainmaster carpets (see BW, 9/8/03, "Is a Low-Fiber Dupont More Appetizing?").

Koch's latest deal stemmed from last year's $610 million purchase of two Georgia-Pacific pulp mills. Following the GP purchase, Koch will install its own CEO to run the outfit, which had 2004 sales of $19.7 billion. Georgia-Pacific's headquarters will remain in Atlanta, however. GP shareholders should be pleased as well. Koch is paying $48 per share, or 38.5% more than the stock's closing price last week.


  But the takeover may yet force the reclusive brothers into the spotlight. While Koch Industries has been debt-free since brothers William and Frederick were bought out for $1.1 billion in 1983, Georgia-Pacific carries nearly $8 billion in debt. That means Koch Industries will have to open up to creditors and debt-rating firms -- at least until the family pays off these new obligations.

They may have to be more public for other reasons, too: Their company is now bigger than DuPont , International Paper (IP ), and Weyerhaeuser (WY ) combined. Moreover, Georgia-Pacific is a consumer-products company with brands such as Brawny, Mardi Gras, and Dixie. Charles Koch joshed around with Georgia-Pacific employees after the deal was announced, asking for another helping of Georgia cracker pie. He earned another chuckle by saying that his job was like riding a bicycle and that even at 70, he planned to keep pedaling until he fell off.

He was serious as well. "As a private company with over $60 billion in revenues that reinvests 90% of its earnings, we have the flexibility and resources to pursue strategies and investments that we couldn't as a public company," Charles Koch said. "Our value doesn't fluctuate with quarterly earnings. So we can focus on building and investing for the long term. And believe me, that's what we do."

But even as he made his biggest deal, Charles Koch continued to shun the media. Koch Industries is private for a reason.

Arndt is a senior correspondent in BusinessWeek's Chicago bureau

Edited by Phil Mintz

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