Blackstone Prepares IPO as Koch Backs Other Model

March 21 (Bloomberg) —- If Blackstone Group LP can go public, anyone can.

Until the talk of a Blackstone initial public offering surfaced, most of us thought the value of the private-equity firm depended on its exemption from the limits that constrain exchange-traded equities. Maybe Blackstone, or Fortress Investment Group LLC, or the other companies that went public recently, are right in thinking there is nothing like the mirror of markets to keep a business on its toes.

As many of us know from aerobics class, sometimes all a mirror does is make you trip.

There are businesses, moreover, that prefer life without the mirror. The largest of those is Koch Industries Inc. Koch (pronounced "coke") engages in a range of work from refining chemicals and fibers to making consumer products such as Brawny paper towels. Koch's book value has grown 2,000-fold since 1961, the year its chief executive, Charles Koch, came to work at the family company. That compares with a 123-fold increase for the Standard & Poor's 500 Index over the same period.

To get a sense of Charles Koch's thinking on the public-private tradeoff, I phoned him this week at Koch headquarters in Wichita, Kansas. The 71-year-old Koch, an engineer by training, spoke of quarterly earnings pressure as "pernicious."

He said the old truism still held: If you, as a chief executive, obsess about delivering those "ever-increasing and predictable quarterly earnings, you are going to sacrifice long-term value." He says only companies whose bosses the markets trust — such as Warren Buffett at Berkshire Hathaway Inc. — can focus on multiyear investments. In doing so, Buffett, the Sage of Omaha, has made a public company seem as if it is private.

Moral Markets

Koch is a big fan of economic liberalism. He says markets are moral and he favors the Austrian economist and philosopher Ludwig von Mises. All this comes through not only in his talk, but in a new book, "The Science of Success." Indeed, Koch Industries applies von Mises in ways that probably work better in a private company than a public one.

The book speaks, for example, of the importance of clear property rights: "the biggest problems in society have occurred in those areas thought to be best controlled in common." His company translated this theory into action with the 2005 purchase of Georgia-Pacific Corp., formerly traded on the New York Stock Exchange.

One of the things that came with the paper and consumer-products company was thousands of asbestos lawsuits. When Georgia-Pacific traded publicly, management felt intense pressure to settle even suits that had no scientific basis. It mattered less that shareholders were losing out. Or, in Koch's terms, ownership was too diffuse for anyone to take a stand.

Fighting Robbery

Now, Koch says, his company often does fight for Georgia-Pacific in court rather than settle.

Koch says the decision will save money on litigation.

"If somebody wants to rob you, you can't stop them," he says. "But, if you make it more difficult, if you have better defenses — for example if you try real hard to always do the right thing — you are not as easy a target."

Koch has his own method, which he calls Market-Based Management, a mixture of ideas from von Mises, W. Edwards Deming, and his own readings. When it comes to job candidates, he says, virtue matters along with talent.

Koch has hired its 80,000 employees from all kinds of universities. But the company generally favors applicants "from rural areas where people are more modest," and institutions where there are "kids who work on a farm or had to work their way through school," he says.

'Vindictive Triumph'

That means state universities such as Wichita State, Kansas State, or Emporia State, he says, or Georgia Tech for Georgia Pacific. Never mind that Charles Koch collected several degrees from Massachusetts Institute of Technology, Koch Industries eschews the Wall Street obsession with know-it-all Harvard and Yale MBAs.

Another Koch rule is zero tolerance for the bullying personality. Charles Koch quotes psychiatrist Karen Horney on the negative trend of "vindictive triumph" in the workplace. Vindictive triumph is the typical mode of the manager who, as Koch puts it, "makes his goal to hurt others for real or imagined humiliations," and becomes ever nastier as he gains power. As anyone who has ever worked in New York knows, that personality flourishes. Midwestern Koch ejects bullies.

Again, exactly how von Mises and Horney on the one hand improve the profitability of Stainmaster carpet and Dixie cups on the other may elude the average investor. These Koch Industries products could sell without philosophy. Charles Koch might appear slightly quirky in the market's looking glass.

Public or Private

But his system has worked. And what comes through clearly enough in Charles Koch's conversation and in his book is a streak of pragmatism that any kind of investor, public or private, can appreciate.

Koch once asked electricians at a gas-liquids plant in Medford, Oklahoma, to track their own productivity. Instead of being more productive, they wasted time on what they called Charts for Charles. The company told the workers to stop worrying about the charts.

It is still possible that Koch Industries will go public someday. What worked in Omaha can work in Wichita. But in a week of Blackstone news, Koch Industries is a reminder that companies can still do fine without that mirror.

(Amity Shlaes is a visiting senior fellow at the Council on Foreign Relations. The opinions expressed are her own.)

© Copyright 2007 Bloomberg

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