inside the plant, where they were liquefied and pressed into the paper-like rolls of fluff pulp.
Wesley Jones, who had given the investor presentation to Hannan and his team, was the head of Georgia-Pacific’s pulp division in 2004. He saw firsthand how Koch Industries revitalized the operation. Jones had watched the pulping operation decline during a long era of deprivation and underinvestment. The problem traced back to Georgia-Pacific’s corporate culture. When he first joined the company, there had been a scrappiness to it. Georgia-Pacific managers liked to employ the word “maverick” to describe their corporate culture. Then Georgia-Pacific went on its corporate buying spree in the 1990s, and the company started focusing on administrative function and cost reduction. Experimentation and failure were not quite so prized, while paperwork and superior process were. Decisions had to be approved by committees, investments were slowed, and autonomy was shifted from the ground level to the ranks of middle managers or above. The problem grew worse after the deal to buy Fort James in 2000. After that, the executives slowed down capital investment plans as they steered more money into paying off debt. The neglect was causing wear and tear on the plant’s equipment. Jones was worried that the machinery would start to break down, in large and noticeable ways.
Then Koch bought the company. Soon after that, Jones wanted to buy a complicated new processing tower that would help speed up production. The tower would cost somewhere between $35 million and $40 million. At Georgia-Pacific, Jones would have gotten together a formal proposal for the investment and then pushed the proposal uphill through a dense thicket of bureaucratic channels where any vice president could veto it and any two vice presidents could debate its merits indefinitely. In 2004, he mentioned the investment idea, almost offhandedly, to someone from Koch. Then he found himself on the phone with someone in Wichita who asked him about the tower and what it could do.
Jones was given approval to spend about $40 million. Over the phone.
“It was like a month or two after the acquisition. I was kind of floored,” Jones recalled. “I remember putting the phone down and thinking, Damn . . .”
Koch carried out other changes at Georgia-Pacific that exploited Koch’s private ownership. Koch jettisoned the use of budgets, for example, just as it had done back in the 1980s. Because it was a publicly traded firm, Georgia-Pacific’s employees invested countless hours of their time to write quarterly and annual budgets, setting out targets to be met to please shareholders. This created a circular logic—invent a budget, then work to meet it—that caused strange distortions to the work flow and wasted effort inside Georgia-Pacific.
Karen Marx, a logistics manager at Georgia-Pacific’s tissue paper mill outside Savannah, said that managers at the mill used to rush to meet targets at the end of each quarter, speeding up shipments leaving the plant, whether it was necessary or not. “It was always like ‘Let’s get more shipments out the door,’ ” Marx recalled. This ended when Koch took over. Budgets were replaced by “goals,” which were drawn up in an almost hasty manner, taking perhaps one-tenth of the time to produce. The only purpose of the goal was to give Koch executives a rough idea of their cash expenditures for the year. Managers were not pressured to meet the goals. They spent much less time trying to predict the future—and zero time trying to impress stock analysts or outside shareholders.
Charles Koch gained confidence from the pulp mill experiment. He was so confident that just a year after buying the pulp mills, Charles Koch was considering a plan to buy all of Georgia-Pacific outright and take the company private. Koch Industries could apply the same techniques to the entire company: 10,000 percent compliance, targeted investment, and flexible management that didn’t focus on quarterly results.
But Georgia-Pacific wouldn’t come cheap. The company would cost at least three times the $4 billion Koch paid for Invista, and it would require multiple billions of dollars in debt. Charles Koch hated debt. He strove for years to maximize his company’s cash flow, boost its savings, and keep borrowing at a minimum. This is what gave Koch the flexibility to seize opportunities quickly; the company wasn’t hampered by high debt payments.
The private equity business, however, turned this theory on its head. Debt was the lifeblood of the private equity industry and the broader American economy during the 2000s. The theory behind debt-heavy deals was simple, ingenious, and immensely profitable