How did Koch Industries grow to become one of the largest privately-held companies in the United States? Charles Koch inherited a small oil company from his father, Fred Koch, in 1967. Over the next four decades he grew it into a massive conglomerate, all without tapping the public markets.
The first step to Koch’s expansion was the Pine Bend refinery, its first cash cow. How that refinery was transformed into a cash gusher is covered in a separate case: Taking Process Control to the Limit at Koch. Decades later, when interviewed by author Christopher Leonard for his book Kochland, multiple former Koch Industries executives would refer to the Pine Bend refinery with a sense of admiration, almost awe. Nearly all of them, Leonard reports, would use the term “cash cow” — the execs were well aware of the role Pine Bend played in the subsequent company expansion.
But there were other factors that contributed to Koch’s empire.
In the mid-1970s, just as engineer Bernard Paulson was deep in the weeds of breaking down and then optimising Pine Bend, Charles Koch hired a man named F. Lynn Markel. Markel was a finance guy, then working for a smaller company that ran a chain of television stations in Wichita. After a series of intense interviews, Koch hired him as the assistant controller over Koch Industry's oil division. A year later, Markel was promoted to controller over the entire corporation. It was in this seat that Markel helped Koch change its financial management.
The biggest problem that Markel faced in those early years was the issue of company-wide budgeting. The mid-70s was an era of extreme price volatility. In 1973, Egypt and Syria had launched a surprise military attack against Israel. The United States assisted Israel in its defence, leading a consortium of Arab nations to retaliate in a then-novel way. They banned all oil exports to the United States, at the same time cutting overall production by 5%. For each subsequent month, the Arab nations cut an additional 5% of production. This caused the equivalent of an atom bomb going off in America’s economy.
To put it delicately, oil prices were extremely volatile when Markel joined Koch. His challenges were made worse by the fact that the oil shock had far-reaching impacts across the entire country, sending interest rates and inflation spiking. President Richard Nixon imposed rationing measures shortly after the Arab oil embargo, even going so far as t ...
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