Case 44

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Case #44
Hershey’s

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($7.5 billion stock,$ 5 billion cash)| $10.5 billion(all cash)| Bid (per share)| $89| $75|
Hershey’s 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.

Hershey Foods Corp.
MHS Students & Alumni

HSY Shareholders

Hershey, Pa.
Residents
Wrigley

Hershey...
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