Koch Industries, the industrial conglomerate owned by the brothers Charles and David Koch, is making a new acquisition. The company is paying $7.2 billion in cash for Molex, a maker of electronic components used in the iPhone, among other devices. It is the Kochs’ largest deal since their purchase of paper products manufacturer Georgia-Pacific in 2005.

The Kochs are widely reviled for quietly supporting the Tea Party movement with their significant wealth, but I don’t begrudge them the right to make shoddy arguments if people are willing to listen. Their business practices, however, are  far more destructive. At the companies the Kochs control around the world, there appears to be a pattern of corrupt, monopolistic, and generally unlawful behavior.

In offering $7.2 billion for Molex, the Kochs are betting that the company is potentially worth much more than public investors on the stock market think it is now. Shareholders will receive $38.50 per share of common stock, which is 31 percent more than last week’s price on the stock market.

Whatever else you might want to say about them, the Kochs never pay too much for anything, ever. Why are they so optimistic about Molex?

Part of the answer is that Molex has been paying a hefty dividend of around $170 million a year to its investors, so the 31 percent premium is somewhat misleading, but the dividend isn’t enough on its own to explain the high price that Koch Industries is paying.

The company, based in Lisle, Ill., is largely owned by the Krehbiel family, which established Molex in 1938. Members of the family and the company’s management own 32 percent of common stock. The company had 35,983 employees on June 30, but Shawn Harrison, an analyst at Longbow Research, suggests that number might have to decrease if the Kochs are going to make money on the deal. Molex is not as profitable as its competitors, Harrison argues, because the management has tolerated unproductive expenditures. They will have to close some facilities, reduce the size of the workforce, and shift the company’s focus away from consumer electronics, a market that is approaching saturation.

“The transaction is expected to provide substantial opportunities for our worldwide employees, many of whom have spent much of their working lives at Molex and are responsible for the company’s long-term success,” chairman Fred Krehbiel wrote in a statement that, given the economic reality of the deal with the Kochs, appears duplicitous at best.

“It will be easier for MOLX management to make the cost-cutting moves under Koch ownership given a move away from the public eye,” Harrison and a colleague wrote.

Whether as a result of the scrutiny that comes with owning a public company, or simply out of fondness for the businesses they inherited, the Krehbiels haven’t been able to do what’s necessary to make their company competitive. “There’s a family ownership dynamic,” Harrison told me. “Maybe in some cases the family was willing to hold on to some of the costs instead of taking a more aggressive look at them.”

Whether the Koch brothers’ purchase of Molex is likely to benefit the economy and society as a whole is an open question. On the one hand, they probably will make the company more efficient and more profitable. On the other hand, as Krehbiel acknowledged, Molex probably owes a large portion of its success so far to its employees, who might not have stayed with the company and made countless unrecorded sacrifices on its behalf over the years if they hadn’t trusted the Krehbiels. I see the sale as the family reneging on a previous implicit understanding with its workers.

And as Steve Pearlstein noted earlier today, when corporate leaders make a habit of violating employees’ trust in the name of protecting equity investors, the system as a whole suffers, and so do shareholders.

One last observation: there is no good intellectual reason for distinguishing between a violation of this trust and the trust that a community or a country places in a corporation. To be sure, there are remedies at law when two people die in an exploding cloud of butane, as occurred over one of the Kochs’ pipelines in Lively, Texas in 1996. Yet those remedies are not substitutes for contracts: there are limits to what prosecutors can prove in court, many offenses go undetected, and the law can only do so much. After the explosion in Lively, the father of one of the deceased received $296 million from Koch Industries after he won a wrongful death lawsuit, but he never saw his daughter alive again. In that case, the Kochs simply exploited people lacking adequate contractual and legal protections for personal gain. They could do the same to the 35,983 employees of Molex.

Post filed under Economy.

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