Koch Industries was founded by Fred Koch in 1940 and is majority owned by his sons, better known as the Koch Brothers—David and Charles, with each owning 42% of the company. David, 79 years old, stepped down from his role with the company in 2018 due to health issues, while Charles, 83, remains Chairman and CEO.

Koch Industries is the second-largest privately held company in the U.S., per Forbes annual rankings, generating $110 billion in annual revenues. This has helped position the Koch family as the second richest family in the world, behind only the Walton family (Walmart owners). The Bloomberg Billionaires Index puts the Walton family fortune at $152 billion, while the Koch family is worth $99 billion.

Fred Koch: Father and Founder

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 generates annual sales of $119 billion and is the second-largest privately held company in the U.S. In 1961, the company was worth $21 million. This equates to a 57-year cumulative return of more than 476,000%. To put that into perspective, the Standard & Poor's 500 Index increased roughly 4,210% between Jan. 1, 1961 and Jan. 1, 2019. As of June 2019, Koch Industries had 120,000 employees worldwide.

All of Fred Koch's four sons have become billionaires as a result of the unprecedented growth of the family business. The two brothers are the only members of the family's second generation who still play an active role in the management of the company.

There are four Koch brothers, but only two—Charles and David—remain owners of Koch Industries, with Frederick and William having sold their stakes in 1983.

Head Start to Wealth

Following the death of his father Fred in 1967, Charles Koch assumed the role of chairman and chief executive officer (CEO) of Rock Island Oil. He was 32 years old at the time and had been working in the company for a little more than five years. 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 happen to him.

During a New York magazine interview, David Koch briefly spoke about his father’s unfortunate 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. The company was valued at $21 million a few years before his death in 1961. Additionally, the company already owned several stakes in oil refineries throughout the country.

Key Takeaways

  • Founded in 1940 by Fred Koch, Koch Industries is majority owned by his sons David and Charles.
  • The Koch brothers are the second-richest family in America, with $99 billion in wealth.
  • Koch Industries is the second-largest private company in the U.S., generating roughly $110 million in sales annually.
  • The company uses a Market-Based Management style, where the organizational structure is kept flat to allow for the free-flow of ideas.
  • The brothers are known as “GOP kingmakers,” given their robust monetary support to the Republican party, but they are also heavy supporters of free markets and civil liberties.

Billion-Dollar Conglomerate

Charles continued to expand the company after taking over as CEO 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 into growing the business.

Charles Koch changed the name of the family business from Rock Island Oil to Koch Industries to honor his father after his death.

David Koch, the younger brother of Charles Koch, joined the company as a technical service manager in 1970, and he quickly rose through the 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. A short list of core industries in which the Kochs have invested over the years includes petroleum, chemicals, ranching, finance and trading, especially commodities, fertilizers, architecture, paper, transportation, and distribution.

Charles has employed a Market-Based Management style at Koch Industries, where the organizational structure is kept flat to allow ideas to flow freely and quickly.

Growth via Acquisitions

According to a filing with the Securities and Exchange Commission (SEC), Koch Industries is "a collection of capabilities continually searching for new ways to create value," and each subsidiary "strives to bring the power of the free-market inside its business to maximize productivity and adaptability."

Koch Industries' Landmark purchases include the $22 billion acquisition of Georgia-Pacific in 2005, bringing in Quilted Northern toilet paper, Brawny paper towels, and Dixie cups to the business. In December 2012, Koch Industries spent $7.2 billion to purchase Molex, a global electronic components manufacturer. The company was notable given its major client, Apple (AAPL). The deal raised eyebrows because of its sky-high valuation, as $7.2 billion was roughly 30 times Molex's earnings at the time of the purchase.

Koch Industries 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.

In 2015, Koch Industries contributed $100 million to an investment fund launched by Eaglehill Capital Partners LP. The fund is set up to help private equity takeovers of small-to-medium-sized businesses, mostly through debt financing.

Lesser Known Koch Brothers

Other brothers, 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 exchange received $700 million. Frederick and William did partake in public disputes and a lawsuit over the years against Charles and David, claiming they were short-changed during the 1983 buyout of their stakes. The lawsuit has since been settled. 

Frederick has since moved to Monaco and now collects art, while William serves as the CEO of Oxbow, an energy company he founded after selling his stake in Koch Industries. As of June 2019, Oxbow was the 184th largest privately held company in the United States with $2.5 billion in annual revenue.

Political Interests

Charles and David Koch are sometimes referred to as "GOP kingmakers." They have given millions of dollars to the campaigns of Republican candidates over the years. Their organizations provide grants to more than 250 colleges and universities for research and education programs, including the Institute for Humane Studies, which promotes individual liberty and free market economics. The Charles Koch Institute offers professional education programs to help professionals "successfully advance economic freedom through their careers." It actively seeks doctoral students to advance academic research in the fields of "free societies" and "human well being and prosperity."

According to a Politico article, the Koch brothers have invested more in politics than virtually any other individuals in America. The article also noted that their advocacy groups employed 1,200 full-time staffers in 107 offices in the U.S., more than three times the size of the Republican National Committee (RNC).

David spoke about his interests in politics during a 2014 interview with The Associated Press. 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.”

Fred Koch was an active member of the John Birch Society, a group dedicated to fighting communism. Charles helped co-found the Cato Institute in 1977, which is a think tank that supports libertarian causes, such as civil liberty protections.

The Bottom Line

A combined fortune of nearly $100 billion makes the Koch brothers America's second wealthiest family. The vast majority of their fortune is invested in the family-owned business, Koch Industries. What started as an oil refinery more than 75 years ago by Fred Koch, has grown into a diversified conglomerate that generates $110 billion in annual sales. Charles and David Koch are the largest shareholders in Koch Industries, both owning a 42% stake in the company.