Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (15 page)

On November 25, 1980, as dusk spilled across the plains surrounding Koch’s Wichita headquarters, Bill stepped into Charles’s office. It was the Tuesday before Thanksgiving and the brothers had scheduled a meeting to discuss liquidity, but Bill had other matters on his mind. He told Charles that he and other stockholders wanted him to call a special shareholders meeting to, among other things, discuss Bill’s role in the company.

Charles was stunned. “You’re embarking on a program that’s going to destroy the company,” he seethed. “You’re out for revenge against me. You won’t get your self-respect from attacking me. You and the shareholders should be cheering on what I’ve done for the company instead of complaining.”

“Charles, let’s talk about what we want to do here.”

Charles laughed sarcastically. “Billy, you’re the type of person that if the bullet is ricocheting around the room and I say duck, you want to debate the merits of the bullet.”

“Charles, all I want to talk to you about is how to improve the company.”

“Well, Billy, you hate me, you’re out to get me.”

“No, Charles, that’s not true.”

There was no sense forestalling the inevitable. If Charles and Bill could not get along as brothers, how could they continue on as business partners?

“We need a divorce,” Charles said finally. They would have
to divide the company, or one brother would need to buy out the other.

“Well, Charles, if you’re not going to call the meeting, then I’ll call it,” Bill said. He walked out of Charles’s office, leaving the shell-shocked CEO to fume and fret.

“One piece of advice my father gave me was that, ‘If you want someone to hate you, make him a lot of money,’ ” Charles reflected later. “I didn’t understand it at the time. I understand it now.”

As Charles anxiously spent the holiday in Wichita with his family, David celebrated Thanksgiving in New York with Frederick, dining in the tenants-only restaurant located off the lobby in Frederick’s residence at 825 Fifth Avenue. The prewar co-op, designed in the 1920s by J. E. R. Carpenter, was one of the jewels of Fifth Avenue. It had a striking double-gabled roof of red terra-cotta tile, and a roster of upper-crust tenants.

David lived in a U.N. Plaza duplex overlooking the East River, perhaps a ten-minute cab ride from Frederick, but the brothers tended to see each other only when their mother visited. Today, however, David had an agenda. Charles had told him about his conversation with Bill, and the possibility that their brother might call a shareholders meeting. He wanted to gauge where Frederick stood.

David turned up at Frederick’s apartment 40 minutes early, before the other guests had arrived, and he filled him in on the recent strife between Bill and Charles. He incorrectly assumed his eldest brother was in the dark about developments at their family company. “Fred listened attentively,” David recalled, “and I thought I was educating him for the first time about what was happening.… Obviously, I was very naïve.” According to Frederick, he remained quiet because “at this point in time William had asked that I not reveal my reaction to the proxy fight.”

Charles had told David to keep an eye out for a letter announcing
a shareholders meeting, and David fished it out of the mail at his office the Friday after Thanksgiving. “Enclosed is a notice for a special stockholders meeting of Koch Industries that a number of Koch stockholders are calling to consider increasing the Board of Directors of Koch Industries to nine members…” the cover letter read. “This broader representation will be important in making decisions on stockholder liquidity and dividend issues which will be decided by the board.”

David phoned Charles in Wichita, reading him sections of the letter in disbelief. Bill’s name was on the announcement. Even more alarming, so was Frederick’s. David had spent hours with his oldest brother the previous day; Frederick had played dumb, never mentioning the plan they had set in motion. It seemed plain to Charles and David that a hostile takeover attempt was under way and that Bill might be angling to oust Charles.

When he hung up with Charles, David phoned Frederick. “I got this notice, Freddie, what’s going on?”

“Well, I think it’s time for a change in management of Koch Industries,” Frederick responded.

“Why do you want to fire Charles? He’s done a great job.”

“Well,” Frederick said, “are you surprised?” It was no secret that Frederick and Charles disliked one another. (Frederick would later say that the goal was not to remove Charles as CEO, but as board chairman.)

On Saturday, David tracked down Bill, who was spending the weekend in Oklahoma City with members of the Simmons family.

“Are you going to fire Charles?” David demanded when Bill came on the line.

“No we’re not,” Bill said. “We have no intentions to.”

David didn’t buy it. “You’re lying,” he said. “You’re no brother of mine. I never want to have anything to do with you again.” He slammed down the phone.

That day, Charles heard from J. Howard Marshall II. The elderly oil tycoon, then seventy-five, had been friends with Fred Koch and was fiercely loyal to Charles. Marshall considered his decision to swap his interest in Great Northern Oil for Koch stock “either the smartest or the luckiest thing I ever did, and maybe a combination of both. It turned out to be the best deal I ever made.”

Earlier in the week, when Charles informed him of Bill’s machinations, Marshall had reassured Koch’s worried CEO that neither of his sons, who together controlled a little over 8 percent of the company stock, would be involved; they’d never cross their father. By Saturday of Thanksgiving weekend, Marshall, however, was shocked to learn that this was precisely what his elder son, Howard III, intended to do. When Marshall finally spoke to his son, who confirmed his role in the unfolding proxy fight, Howard II pleaded with him, making “a case based on family obligation and loyalty,” but Howard III remained committed to Bill’s plan.

“What do we do now?” Charles asked after Marshall had explained the situation.

“Well,” Marshall said, “there’s one thing that Howard III understands, and that’s money.” Marshall would attempt to buy his stock back from his son. Without Howard III’s small, yet decisive, percentage of voting stock, the dissident shareholders would lack the shares necessary to ram through the changes to the board they desired.

The next day, Sunday, Charles and Koch’s general counsel Don Cordes flew from Wichita to Houston, where they picked up Howard Marshall, and continued on to Los Angeles, to present an offer to Howard III. It was less than a week before Bill’s shareholder meeting was scheduled to commence, on Friday, December 5.

“I’m going to offer Howard III $8 million, take it or leave it,” Marshall said as they were en route.

When Bill learned of Marshall’s offer to his son, he offered to double it. A few agonizing days passed in Los Angeles, as Howard III pondered his next move—selling out to his dad or going against him. He had underestimated his father’s reaction to the shareholder insurrection. The prospect that his son might betray Charles had brought the old man to tears. Marshall looked so frail as he laid out an $8 million cashier’s check in front of his son. It was as if the dispute was sapping the very life force out of him.

Family loyalty eventually won out. Howard III rejected Bill’s offer. He accompanied Marshall Senior and Koch’s lawyer, Don Cordes, to his bank, where he relinquished his Koch shares, stored in a safety-deposit box. The balance of power had abruptly shifted: With the Marshall family’s shares, along with a small amount of stock owned by longtime Koch Industries executives, Charles controlled 51 percent of the company.

With Bill’s rebellion falling apart, he called off the shareholders meeting scheduled for that Friday. But Koch’s board did convene that day: its purpose to decide Bill’s fate. He’d crossed a line. His scheming had sparked a wildfire of panic among Koch employees. Bill had lost the trust of Koch’s senior managers. How could he continue on with the company’s employees wondering what he might do next?

Charles had wanted to fire Bill that summer. The narrowly averted putsch confirmed to him that he shouldn’t have relented. Charles entrusted Varner, with his gentle though direct manner, with the task of convincing Bill to resign quietly. But Bill refused, forcing Varner to make a formal motion to the board calling for his ouster. In the dark-paneled boardroom, one by one four hands went up.

But David’s wasn’t among them.

Over the past year, David had been torn apart, between loyalty to his twin and fealty to his older brother. He was furious with Bill for throwing the company into turmoil; in a surge of anger he had
even told his brother that he wanted nothing to do with him. But that wasn’t true. David wanted desperately to maintain a connection to Bill. Charles, in raising his hand in support of Bill’s firing, had made a choice not just to excommunicate his brother from the company, but to sever him from his life. David couldn’t bring himself to do the same, and thankfully he didn’t need to. The vote carried without him taking sides.

The following week, on December 10, Koch’s general counsel met with members of the dissident shareholders group at the Oklahoma City law offices of Jimmy Linn to begin negotiations between the opposing factions. Cordes floated an offer to buy out the dissidents at $140 a share (which would have made Bill’s stake worth about $329 million). He also delivered a warning—or was it a threat? He cautioned that Bill and his shareholder allies should steer clear of Wichita. The dissidents had stirred up such hostilities, the lawyer said, that their safety could not be guaranteed.

As Christmas 1980 approached, Bill sent gifts to his niece and nephew, Elizabeth and Chase, who were then five and three, respectively. Even this seemingly harmless gesture filled Charles with suspicion. He sent the presents back. When Bill called his brother to wish him a Merry Christmas, Charles refused to come to the phone. Mary, as usual, had invited her sons to spend the holidays in Wichita, but Charles told his mother that he and his family would not attend Christmas dinner at her home if Bill and Frederick were there. Because of the discord, Mary told Bill and Frederick not to come home for Christmas. (Frederick doesn’t recall being disinvited. If the brothers “chose not to come, the decision was theirs.”)

Bill’s efforts to assert himself had failed spectacularly. If he had felt like an outcast before, now he truly was the family’s black sheep. Since childhood, when Fred and Mary Koch sent their tantrum-prone son to a psychologist to get over his intense resentment of Charles, Bill had periodically lapsed into deep depressions.
But the six months after his firing from Koch were among his darkest. Cloistered in his Dover, Massachusetts, mansion, he spent his days plotting with his lawyers and vegetating in front of the television. “This was the worst time I’d ever seen him in his life,” David recalled. “He was almost paralyzed, almost lifeless.”

David tried to help his brother get back on his feet. In late 1981, Bill and his girlfriend Joan urged him to visit a Boston psychiatrist they’d been seeing; they believed this would help to improve communication between the twins. David, who made weekly business trips to Massachusetts, warily obliged.

The experience was surreal. The psychiatrist “spoke for about an hour and a half on why I needed psychiatric care,” David remembered. Growing angry that he had been lured to the psychiatrist’s office under false pretenses, David finally forced the conversation back to Bill. “I asked a number of questions… to the psychiatrist and one was why was Billy so angry and nasty to our mother and made her cry all the time, upset her so much, and he said, ‘Well, that’s a very positive sign because people with your brother’s problems have to climb out of their depression on the backs of the people they love the most.’… I asked him about why Billy… started this fight to get control of Koch Industries and he said, ‘Well, Billy has a secret desire to fail’ and that he knew that when he started this fight with Charles that he couldn’t win. I asked the doctor what I could do to help my brother and get him out of this depression and terribly unhappy state that he was in, and he said, ‘… there is nothing that you can do… until you straighten yourself out.’ ”

David left the two-and-a-half-hour session deeply shaken, and with the suspicion that this shrink had prodded Bill to take a stand against Charles. The experience shocked him so much that he wrote everything down. According to David, when he spoke to Bill a few days later, Bill reported that the psychiatrist had told him that his twin was “totally under the control of Charles.”

Back at Koch Industries, Bill’s firing had removed one threat to Charles’s hegemony. But Bill, Frederick, and the dissident shareholders (all of them family members) still controlled nearly half of the company. Like his father, Charles demanded loyalty from his business associates and employees, and he couldn’t pursue his plans for Koch Industries always looking over his shoulder for the next coup attempt by malcontented stockholders. The company and the dissidents needed a “divorce,” as Charles had put it. And it would be a messy one.

All options were now on the table, including taking the company public. In early 1981, Koch entered preliminary merger talks with Kerr-McGee, a publicly traded oil and gas company. The deal would have exchanged Koch shares for Kerr holdings, solving shareholder liquidity problems. But the companies could not reach any middle ground on a valuation of Koch.

Meanwhile, Koch hired Morgan Stanley and Lehman Brothers to conduct parallel valuations of the company. Both investment banks determined that Koch shares should fetch in the vicinity of $160 a share, a price Bill (who stood to net about $376 million) and his allies deemed far too low. Bill subsequently retained Goldman Sachs and the Boston-based consulting firm Bain & Company (where a young Mitt Romney was cutting his teeth) to conduct their own analyses. As was his style, Bill was not a passive client; he grilled his advisors and pressed them to scrutinize every corner of the sprawling conglomerate. “Bill was a very demanding client,” remembered Alfred Eckert, who led the Goldman Sachs team evaluating Koch Industries, “very involved, asked very good questions, spent a lot of time making sure that no stone would be left unturned.”