The Koch Brothers: America’s 2nd Wealthiest Family

The Koch Brothers: America’s 2nd Wealthiest Family
By Warren Cassell

At the age of 27, a chemical engineer by the name of Fred Koch developed a new and more efficient process for turning crude oil into gasoline. A little more than a decade after making his discovery, Koch used the improved process to start an oil refinery business of his own. The company was initially called Wood River Oil and Refining Company, then later became Rock Island Oil and Refining Company before finally being renamed Koch Industries. Since then, the company has expanded its operations beyond oil refining into industries such as agriculture and consumer goods manufacturing. Fast forward to today, Koch Industries realizes annual sales in excess of $110 billion and is the second-largest privately held company in the United States. The company was worth $21 million in 1961, and as of October 2015 had an estimated value of $100 billion. This equates to a 54-year cumulative return of 476,090%. To put that into perspective, the Standard and Poor’s 500 Index (S&P 500) increased by a mere 3,304% during the period Jan. 2, 1961 to Oct. 16, 2015. As of December 2015, Koch Industries had roughly 100,000 people on their payroll.

All of Fred Koch’s four sons have become billionaires as a result of the unprecedented growth of the family business. In fact, according to Forbes magazine, the Koch brothers have a combined net worth $86 billion. With a personal fortune of $43.7 billion each, Charles Koch, 80, and David Koch, 75, are the richest of the four Koch brothers. They are both ranked 6th on Bloomberg’s list of the world’s wealthiest people, and are the only members of the family’s second generation who still play an active role in the management of the company. In addition, Charles and David each own a 42% equity stake in Koch Industries. Below is an overview of how Koch Industries grew into the second-largest privately held company in the United States.

A Head Start to Wealth
Following the sudden death of his father, Charles Koch assumed the role of Chairman and Chief Executive Officer (CEO) of Rock Island Oil in 1967. He was 32-years-old at the time and had been working in the company for a little more than half of a decade. Before his death, Fred Koch had experienced some heart-related health issues and as such had been preparing his son, Charles, for an eventual handover of management, should anything were to happen to him. During a 2010 interview with New York Magazine, David Koch briefly spoke about his father’s unfortunate and unexpected death. He mentioned, “Father was on a hunting trip bird-shooting in Utah. He was in a blind with a gun loader next to him. He was having heart palpitations and wasn’t shooting that well. Finally, a lone bird came over. He took the shot and hit it square. The duck falls from the air. He turns to the loader and says, ‘Boy, that was a magnificent shot,’ and then keels over dead.”

Despite having wealthy parents, the Koch brothers were raised in an environment that taught them the importance of hard work. Charles is famous for saying that his father never wanted his boys “to turn into country-club bums.” As a result, they were required to spend their spare time working while attending school. In the book, Sons of Wichita, Daniel Schulman wrote, “He [Fred] put them [his sons] to work milking cows, bailing hay, digging ditches, mowing lawns, and whatever else he could think of.”

With that being said, it is still true that the Koch brothers were given a head start when they inherited their father’s business. A couple of years before his death, the company was valued at $21 million and was doing $250 million in yearly sales by 1967. Additionally, it already owned several stakes oil refineries throughout the country. (See also, Top 6 Companies Owned by the Koch Brothers.)

Growing Koch into a Billion Dollar Conglomerate
Shortly after taking on the role as CEO of Rock Island Oil, Charles Koch renamed the company Koch Industries in honor of his father. He continued to expand the company by engaging in a series of strategic acquisitions of oil and energy-related companies such as refineries and pipeline operations. Throughout the history of Koch Industries, the company has reinvested 90% of its net earnings back into growing the business.

David Koch, the younger brother of Charles Koch, joined the company as a technical service manager in 1970, and he quickly rose those the different ranks ultimately becoming the president of Koch’s engineering division by 1978.

At the dawn of the 1990s, Koch Industries began to invest in sectors that were outside of the oil and gas space. In 1995, the company established a $150 million venture capital fund to invest in startups. In 2005, Koch Industries acquired Georgia-Pacific, a leading pulp, and paper manufacturing company, for $22 billion. Most recently the company partnered with Goldman Sachs (GS) in April 2014 to purchase a printing ink manufacturer called Flint Group for $3 billion. In November of that same year, Koch Industries paid $445 million to acquire Oplink Communications, a producer of optical components.

Business and Other Interests Outside of Koch Industries
Charles and David Koch are sometimes referred to as the GOP kingmakers. This is because they have given many millions of dollars to the campaigns of Republican candidates over the years. According to an August 2015 article featured in The Hill, Charles and David, along with a network of other wealthy donors would be willing to put up as much as $889 million to on the 2016 election cycle. David spoke about his interests in politics during a 2012 interview with The Wichita Eagle. He said, “[His father] was extraordinarily fearful of our government becoming much more socialistic and domineering… So from the time we [David and his brothers] were teenagers to the present, we’ve been very concerned and worried about our government evolving into a very controlling, socialist type of government.”

Frederick and William Koch have not been involved with Koch Industries for many decades. The two brothers sold their shares to Charles and David and in exchanged received $800 million. Frederick has since moved to Monaco and now collects art, while William serves as the CEO of Oxbow Group, an energy company he founded after selling his stake in Koch Industries. As of December 2015, Oxbow was the 155th largest privately held company in the United States with $3 billion in annual revenue. (See also, The World’s Most Valuable Private Companies.)

The Bottom Line
Combined net assets of more than $86 billion make the four Koch brothers America’s second wealthiest family. The vast majority of their fortune is invested in a family-owned business called Koch Industries. The company started as an oil refinery more than 75 years ago by Fred Koch, and today is a diversified conglomerate that is worth approximately $100 billion. Charles and David Koch are the largest shareholders in Koch Industries, both of whom own a 42% share of the enterprise.