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Case #44


Synopsis and Objectives

The proposed sale of Hershey Foods Corporation (HFC) during the summer of 2002
captured headlines and imaginations. After all, Hershey was an American icon, and when the
company’s largest shareholder, the Hershey Trust Company (HSY), asked HFC management to
explore a sale, the story drew national and international attention. The company’s unusual
governance structure put the Hershey Trust’s board in the difficult position of making both an
economic and a governance decision. On the one hand, the board faced a challenging economic
decision that centered on determining whether the solicited bids provided a fair premium for
HFC shareholders. On the other hand, the governance decision required the board to balance its
fiduciary responsibility against the original mandate of Milton Hershey to support the Hershey
School in perpetuity. The fiduciary responsibility is relatively simple compared with satisfying a
broad array of constituents, including the Hershey community, HFC employees, and
Pennsylvania’s attorney general.

Suggested questions

1. Assume that you are a member of the Hershey Trust board. To whom (or what) do you
owe your fiduciary responsibility? How does the legacy of Milton S. Hershey affect your
thinking as a member of the board?
2. Is diversification a valid reason to sell HFC? How would such diversification have served
the Hershey School 10 years ago, for example?
3. Based on your valuation of HFC, do you feel the company was fairly valued by the
market before the announcement of the sale? Are the Nestlé–Cadbury Schweppes and
Wrigley bids fair to their own shareholders (i.e., what needs to happen in order for these
bids to create value for the bidding companies)? (Hint: use a discount rate of 7.5% for
your analysis of HFC’s value.)
4. Which, if any, bid would you vote to accept for the purchase of Hershey Foods
Corporation? Is your decision primarily based on the economics of the bids or the desire
to honor the legacy of Milton S. Hershey?
5. If you decided to reject both bids and not sell HFC, what will you do to achieve the
diversification objective? If you decided to accept one of the bids, what (if anything)
would you want to communicate to the constituents who opposed the sale?
Proposed Bids

Table 1. The two bids considered by the trust’s board.

Wrigley Nestlé–Cadbury Schweppes

Total bid $12.5 billion $10.5 billion
($7.5 billion stock, (all cash)
$ 5 billion cash)
Bid (per share) $89 $75
preannouncement stock
price (7/24/2002) $62.50 $62.50
Implied takeover premium 42.4% 20%

Nonprice Considerations

Both Wrigley and NCS recognized other considerations in the context of their offers.
Wrigley has made assurances that HFC would retain jobs in the region around Hershey,
Pennsylvania. NCS agreed to move the headquarters of its U.S. operations to Hershey,
Pennsylvania. Both bidders were trying to address key issues for other stakeholders in the deal:
employees and the local community.

As the case explains, however, consideration for the local community was only part of
the story. Given HFC’s iconic status in the United States, other constituencies quickly became
involved with local, state, and national politicians playing key roles. Most notably, the
Pennsylvania attorney general, who had authority over the Hershey Trust through the county
orphan’s court, had already pursued legal action that could reduce the chances for a successful
deal. Other constituents included current and former employees, former HFC CEOs, and current
students and alumni of the Milton Hershey School.
Figure 1 may help guide a discussion about the various stakeholders that could be
considered part of the transaction.

Figure 1. Various stakeholders possible to the transaction.







The epilogue videos (short and long versions) do an excellent job of wrapping up the case
and are highly recommended as a compelling way of ending the class. The epilogue videos
reveal that the trust voted 10 to 7 to reject both bids and thus remove Hershey from the market.
Bill Alexander reveals that the primary reasons for rejecting the NCS bid were lack of a
guarantee for jobs and an inadequate premium. The Wrigley bid was considered to have an
adequate premium but was, nevertheless, rejected because the Hershey Trust would be able to
otherwise satisfy its diversification goal adequately. Rather than holding HFC shares, the trust
would end up holding Wrigley shares, which could not be sold for three to five years. Moreover,
the board was concerned about Wrigley’s assumption that it could retain the licensing agreement
for the Kit Kat and Rolo brands, even though it would appear not legally possible to do so.

After the dust settled, the seven board members who did not vote to remove HFC from
sale were removed from the board. As shown in Exhibit TN9, the trust board was substantially
reduced in number, resulting in more local representation. On the one hand, one could argue that
the reorganization of the board favored people with a better understanding of the legacy of
Milton Hershey. On the other hand, one could argue that the reorganization more effectively
entrenched HFC and its management, making the board more “takeover proof.” The following is
a summary of the various players in the story.

Hershey Trust Company

In November 2002, pursuant to an agreement with the Pennsylvania attorney general’s

office and the court, the HSY’s board of trustees was reorganized:

 Number of board members reduced to 11 from 17.

 Ten board members, including seven who voted to sell the trust’s holdings in HFC,
departed; four new members added.
 Six of the eleven board members were residents of central Pennsylvania.
 HFC chairperson and CEO Richard Lenny was appointed to the HTC board; all
subsequent HFC CEOs will also serve on the board of the trust.

Hershey Foods Corporation

 One HFC board member retired, and another, Robert J. Hillier, was ousted from both the
HFC and HSY boards.
 Two new outside directors were elected by shareholders in April 2003.
 Hershey completed a major corporate reorganization, which included 750 layoffs, 600
early retirements, and four plant closings.
 In the third quarter of 2001, Hershey booked $17.3 million in charges related to the
proposed sale of the company.
 At the beginning of the sale process, Hershey’s stock rose 25%, to $78.30, but dropped
sharply when the deals fell through. One month later (October 17), HSY shares traded at
 In December 2002, HSY announced a plan to buy back $500 million worth of shares, but
it would not pay a premium on them.
 HSY’s 2002 profits rose 11.6% from 2001, and market share hovered around 30%.
 Chairperson and CEO Richard Lenny announced plans to keep the door open to a joint
venture in order to increase sales abroad. International sales accounted for only 9% of
Hershey’s 2002 revenues.

Nestlé S.A.

 It moved forward with other acquisitions and divestitures in 2002.

 In 2002, Nestlé acquired German ice-cream maker Schoeller Holding Group as well as
U.S. food company Chef America, maker of Hot Pockets and Lean Pockets.
 Nestlé also spun off eye-care subsidiary Alcon Laboratories but retained about 75%
ownership of it.
 The company renamed its water unit from Perrier Vittel S.A. to Nestlé Waters, and
bought Russian bottled-water company Saint Springs.
 The company sold its savory-flavors business, Food Ingredients Specialities (FIS), to
Swiss flavoring-company Givaudan, and its United Kingdom and Ireland ambient-foods
business to Hicks, Muse, Tate & Furst.
 Nestlé formed a joint venture with New Zealand dairy co-op Fonterra to produce and
distribute dairy products in the Americas.

Cadbury Schweppes PLC

 Cadbury Schweppes bought the U.S.-based Adams chewing gum and mint business from
Pfizer, Inc., for $4.2 billion in December 2002. The Adams brands include Dentyne,
Bubbaloo, and Halls throat lozenges. Wrigley had also been a bidder in this deal.

The Wm. Wrigley Jr. Company

 Given its strong balance sheet, Wrigley remained interested in making an acquisition,
particularly in the mint business.
 With increased sales of its products in Russia and China, Wrigley planned to double its
revenues to $5 billion by 2006.
 The firm began looking into health-oriented products.

Epilogue Update: July 2008

In October 2007, CEO Richard Lenny announced that he would resign from HFC. The
press cited Lenny’s frequent frustration with the trust board as a contributing factor to his
decision. Trust Chairman LeRoy Zimmerman stated, “The board of the Hershey Trust … looks
forward to working with the company to improve its performance and advance its vision for
global growth. We thank Mr. Lenny for his service to the company.” HFC had struggled with
rising dairy costs as sales remained flat at around $1 billion. During Lenny’s tenure, which began
March 2001, Hershey stock had continued to outperform the S&P 500 as well as the food-
industry group.

Meanwhile rumors persisted as to potential mergers between HFC and Wrigley or HFC
and the candy arm of Cadbury Schweppes. Surprisingly, however, it was Wrigley that was
purchased as Mars, Inc. (maker of M&M’s®, Snickers® and Mars®) agreed to pay $80 cash for
each share of Wrigley stock in a deal valued at approximately $23 billion. Mars, Inc. was one of
the largest private U.S. companies, and Mars family members were often cited among the
wealthiest individuals in the United States. According to Wrigley Executive Chairman and
Chairman of the Board Bill Wrigley Jr.:
In terms of Wrigley’s ongoing business, the true value of this transaction arises
primarily from enhanced growth opportunities, including the potential for cross-
pollination of people, ideas and brands, and significant enhancements of sales,
marketing and distribution infrastructures. We see this as an historic opportunity
to preserve what is special about the Wrigley Company in terms of values and
culture, while continuing to grow and develop our associates, invest in our brands
and drive long-term generational growth.

As of July 2008, HFC remained independent, and rumors persisted about the conflict between
the company and the trust board.


Stock-Price Reaction to Trust Board’s Announcements

Hershey Stock Price 2002