Hershey Foods Corporation: Bitter Times in a Sweet Place

Abstract

The proposed sale of Hershey Foods during the summer of 2002 captured headlines and imaginations. Six months after making its decision to explore a potential sale, the board of the Hershey Trust Company was examining two serious offers: a joint bid from Cadbury Schweppes PLC and Nestlé S.A., and an independent bid from the Wm. Wrigley Jr. Company. In essence, the board faced both an economic and a governance decision. On the economic side, the board needed to determine the value of Hershey as a stand-alone entity compared with the bids being offered. On the governance side, the board needed to decide whether selling Hershey compromised the board's original mandate from Milton Hershey. A teaching note is available for registered faculty; media supplements and faculty and student Excel spreadsheets are available to enhance student learning.

Excerpt

UVA-F-1409

Rev. Apr. 30, 2018

Hershey Foods Corporation: Bitter Times in a Sweet Place

Hershey's chocolate. Like baseball and apple pie, it was an American icon. So when the largest shareholder in Hershey Foods Corporation (HSY) proposed selling the company in early 2002, the residents of Hershey, Pennsylvania, the state attorney general, legislators, and current and former HSY employees reacted with alarm. For them, the idea of selling the “Great American Chocolate Bar” was an insult to a beloved American institution and a threat to the principles on which Milton Hershey had built his company.

Unlike most large corporations, HSY's majority shareholder was not a corporate raider, institutional investor, or multinational, but rather the Hershey Trust Company (Trust), which owned 77% of its voting stock. The Trust had been endowed by a gift in 1918 by Milton Hershey himself, with the objective of supporting the Milton Hershey School, an institution for orphans in Hershey, Pennsylvania. Nevertheless, in March 2002, the Trust's board of directors decided that the school would be better served if its holdings were less concentrated in Hershey stock. Therefore, the Trust announced its decision to sell its entire stake in HSY, which effectively put the corporation up for sale.

Six months after making its decision to explore a potential sale, the Trust board was examining two serious offers: a joint bid from Cadbury Schweppes PLC and Nestlé S.A., and an independent bid from the Wm. Wrigley Jr. Company (Wrigley). The primary question for the board's 17 members was whether the bidders had accurately valued HSY and, if so, whether the economic value created through the deal was consistent with the board's obligation to safeguard Hershey's legacy of community involvement.

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Keywords: mergers and acquisitions, corporate finance, firm valuation, corporate governance, agency problem