Evaluation Essay on Hershey Foods Corporation

Introduction

It is very evident that one of the main responsibilities that the Hershey Trust Board views their responsibility to be is to the Milton Hershey School. In 1918, Milton Hershey endowed the trust board. The objective of this endowment was to have full support for the Milton Hershey School. Further in March 2002, the Trust Board decided to make a decision that was more in the schools' favor, which was making sure that its holdings were less concentrated in Hershey stock.

Moreover, the composition of the board moved more toward education professionals in that same year with their mandate remaining to serve the interest of Hershey school. There was also an increased concern with the board members that too much responsibility was being put on the shares of Hershey Food Corporation meaning less attention was being focused on the school. In addition, it was the board's obligation to keep up with the Hershey legacy by ensuring that the decisions that had been made were in line with the legacy views. Keeping Hersheys legacy of community involvement was a key obligation to the 17 members of the trust board.

Milton Hershey picked Pennsylvania out of many other locations because he wanted to develop a community, one in which he grew up.

How Society Treats Hershey Foods?

For other community members, they view the responsibility of the trust board to themselves. Hershey Pennsylvania had a population of about 22,400 of which 6,200 were employees of Hershey itself. The population was concerned that Hershey's legacy of community involvement would be compromised in the sense that they will not be taken care of anymore and thus they will not have job security anymore and will lose their jobs.

The community leaders went further and organized rallies to echo their concerns and in addition to that, developed a website www. friendsofhershey. org putting together an amazing number of 6500 signatures that opposed the potential sale of Hershey Foods. The community strongly believed that the responsibility of the trust board was to them as they did not just end on the website but caused further chaos by having public protests that included company employees and retirees and Milton Hershey School. These protests lead to the attention of the attorney general.

The Objective of the Hershey Trust Board

As members of the Hershey board, our fiduciary responsibility would be to the school. The objective of the board is to safeguard the community and the school. Ethically also, it will be morally right for us to ensure all the children that are attending the Hershey school a good education as the school is a key determinant of their future. As members of the board, we would also have to safeguard the interest of the Hershey family. It's a family legacy and we have to ensure that their interests are being met above everybody else.

Evaluation of Hershey Foods Corporation

Based on my evaluation of Hershey Foods Corporation in my own opinion I feel that it was fairly valued to a greater extent before they announced that it was for sale by the stock market. Taking into consideration all the Stock-price performance graphs and charts, stock price responses to trust boards publications graph and the estimated weighted cost of capital for Hershey and industry comparable tables in the case study provided it clearly shows that the company was properly evaluated before the announcement.

According to exhibit 11 for the industry comparable Hershey Foods Corporation (listed on the NYSE) has the lowest number of common shares outstanding with the highest stock price as compared to Cadbury Schweppes PLC-ADS (NYSE), Nestle S A-Spon ADR (OTC), and Wrigley (Wm) Jr Co (NYSE). Furthermore, if HFC intended to sell its stock with the value of its stock to maybe raise more capital and do more investments it still does not raise as much capital as the other two bidding companies.

Based on this information Hershey Food Corporation was fairly valued by the stock market before it was announced that it is up for sale.

Exhibit TN3: Estimated Weighted Cost of Capital for Hershey and Industry Comparables

	Hershey	Wrigley	Nestle	Cadbury Schweppes	Average
WACC	7.34%	8.58%	7.59%	7.15%	7.66%
Ke (CAPM)	7. 75%	8. 58%	8. 58%	8. 03%
Equity($millions) (price ? shares outstanding)	8 455	11 135	80 399	14 296
Price per share	$63.0	$49.5	$51.9	$28.5
Shares outstanding (millions)	134.2	225.0	1 550.6	502.5

From the table above the results show that Wrigley is the company that has the highest WACC and it is above average. However, we cannot compare Wrigley to HFC because it is a chewing gum company yet Hershey Foods Corporation is chocolate and non-chocolate confectionery company and it is also involved with chocolate-related grocery products. Also, HFC is on the top list for companies that manufacture gums and mints. WACC is a company's important figure which is of use to both the company's management for the sake of capital budgeting and to the stock market for valuing its stock.

WACC is a firm's required to return in total for the entire firm that is why it is used most times for internal purposes by the directors of the company. This is done to control the economic possibility of opportunities to expand and mergers. When a company is studying for a possible investment, projects for investment that have expected return more than the WACC of a company usually make extra cash-flow which will make the stock owners have a positive net present value (Jung, 2008). Such company investments ought to end up increasing stock prices.

To make a fair evaluation of HFC and the other bidding companies we would compare the companies WACC and the required rate of return which in this case we would use the Ke (CAPM), where the Hersheys WACC is less than the CAPM (which is used to estimate the required rate of return which is suitable for an asset). Taking the companies rates of return and the percentage for the WACC, for each invested dollar that the Hershey, Wrigley, Nestle and Cadbury Schweppes, 0. 0041cents, 0cents, 0. 0099cents and 0. 0088cents respectively are values the companies managed to gain.

Hence, Hershey was fairly valued by the stock market because for every dollar it was investing out of the bidding companies it was the one who was gaining less (this is not taking into consideration Wrigley because it is a company that only concentrates on chewing gums so it will not be fair to compare it with the other three companies. Also, to support the point that the stock market did a fair valuation of Hershey, the market value of equity for Hershey was low even though it had the highest price per share out of the other three companies.

It is the shares outstanding that were low that made Hershey incur a low amount of equity. Exhibit TN8: Stock Price Reaction to Trust Boards Announcements Stock-price reaction to Trust Boards Announcements is shown in the chart above. Exhibit TN8 above shows the From this graph alone it does show that before the announcement of selling the company the stock market had fairly valued it. If the company was not fairly valued the stock price of the year 2002 would have proven otherwise but the rose for only eight days from there on it stopped rising and it drastically dropped in September.

When the process of the sale began HFC stock increased by twenty-five percent to $78. 30 but drastically fell when the deals did not succeed. A month later on that was in October, Hershey Food Corporation shares were trading at $62. 10. HFC stated a proposal in December 2002 which was to buy back five hundred million dollars shares in value but the company would not pay a premium on the shares. The chart above is from Case 44, exhibit 7 which is showing Hershey's Stock price performance from 1986 to 2001. The results shown by the chart are for HFC and Stock price performance for the industry in the United States.

Following the pattern in the chart, Hershey's stock price has a particular pattern where if in the current high the price is high the following year the price would fall. According to this analysis HFC was valued fairly before any announcement of selling it was made by the stock market because Hershey's stock prices were not stable throughout the years. Only in 1986 that is when HFC's stock price was more than 60% and it doubled the price of the S&P 500. From there on it could not perform as it had done before until it was announced to be up for sale.

Only in 1997 that is when it tried to perform well as it had done back in 1986 but it still could not make it by approximately 14%. The stock price of HFC later dropped in 2001 by approximately 22% which could have been because the demand for its stock had dropped because of the publication that it was up for sale. However, not only considering the stock price for the decision that was made by the stock market we also have to take into account things like historical financial statements of the company. Firstly, the book value of debt in millions for Hershey was lower as compared to the other bidding companies.

Though Wrigley had no book value of debt the other two companies Nestle and Cadbury Schweppes had the highest value of debt in their books. Therefore, to say Hershey should be put up for sale is not fair valuing of a company. According to Exhibit 9 of Case 44, the historical financial statements which include the income statement and the balance sheet of Hershey Foods Corporation reflect that the company was doing very well. The sales of the company increased from the year 1996 to the year 2001 where it was able to cover its cost of sales and remained with a positive balance for gross profit throughout these years.

However, the company experienced a loss on sale of the business which decreased the earnings before interest and tax but there was later in the year 1999 again on the sale of the business which increased the earnings before interest and tax for this particular year. In as much as net income of the company is concerned it increased but decreased in 2001. It decreased due to the low amount of income before interest and tax were charged. Are the Nestle-Cadbury Schweppes and Wrigley bids fair to their shareholders (i. e., what needs to happen for these bids to create value for the bidding companies)?

According to the case study, Wrigley and Nestle-Cadbury Schweppes acknowledged other considerations in the framework of what they were offering. Wrigley guaranteed that HFC would maintain jobs around Hershey, Pennsylvania. As for Nestle-Cadbury Schweppes, the company approved to change its center of operations of the United States jobs to Hershey, Pennsylvania. The two bidders tried to take into consideration important issues for other shareholders involved who are the employees and the native community itself. Nestle-Cadbury they are better when it comes to synergy.

We cannot compare Wrigley to HFC because it is a chewing gum company yet Hershey Foods Corporation is chocolate and non-chocolate confectionery company and it is also involved with chocolate-related grocery products. Also, HFC is on the top list for companies that manufacture gums and mints. The offer from Nestle-Cadbury Schweppes for HFC was ten billion five hundred dollars which were in cash. The offer which symbolized a significantly less premium than the one presented by Wrigley was for seventy-five dollars a share.

Furthermore, the reason why the bid was convoluted was that Nestle got royalties from HFC for its the United States for its Rolo and Kit Kat brands. Before Nestle purchased Downtown, the procedures for certification had been discussed between Downtown and Hershey. For the reason that the procedure for certification was already planned to continue till infinity, Hershey treasured the licensing of the two brands for nearly one billion dollars. Even though, the Case explained the Hershey situation taking into consideration the community was also part of the issue.

Nevertheless, a vital feature of the agreement was that an amendment of ownership of Hershey will have to hand over the entire rights of the two brands back to Nestle. As a result, irrespective of who accomplished the bidding war for Hershey, according to the agreement Nestle was to gain the worth of the agreement for licensing. The agreement comprised of making Hershey in Pennsylvania the center of operations for Cadbury Schweppes in the United States of America and names it the chocolate capital of the world.

With fresh facilities of manufacturing products and experiences of distribution in the country, they anticipated lessening costs by combining operations and reduction of workers. Reducing costs is good for the company even the shareholders would appreciate that. To a greater extent, the Nestle-Cadbury Schweppes and Wrigleys bids were fair to their shareholders. Exhibit 8 shows the Bidding companies financial data, the Beta for all the three companies is less than one where we are comparing the risk of their portfolios to the market as a whole.

All three Betas show that they will be less impulsive than the market. Since the goal of a firm is to maximize shareholder wealth, Nestle and Cadbury Schweppes seemed to be acting otherwise because they are still bidding for a company but they have huge amounts of debt to their book value. As for Wrigley, it is taking into consideration its shareholders because it has no debt at all so it has every reason to bid for Hershey without jeopardizing its shareholders.

Hershey Foods Corporation: Returns

Since several shareholders filed suits seeking assurance that the trust will receive maximum value for its controlling shares and Looking at the stock price reaction to the trust boards announcements I would vote to go ahead and sell the stake of Hershey trust in Hershey foods and therefore put the corporation up for sale to either Wrigley or Nestle SA and assuming the majority of the board takes my side of the vote, the financial markets will react as described below.

Following the news of the announcement of the sale of Hershey foods investor speculation lead to an increase in the Hershey foods share price by more than 20% as according to the case study the stock price soared to $79 per share from $63 per share this shows that the financial markets viewed the acquisition of Hershey as a good thing and reacted positively, therefore, more of Hershey shares will be demanded which will, in turn, increase the share price of Hershey stock.

Since Wrigley is offering $89 per share and a premium of 42% over the pre-announced stock price and on the other hand Nestle S. offered $75 per share and a 20% premium, even though it was lower than that offered by Wrigley it's still higher than the preannounced stock price of $63 per share.

This, therefore, indicates that the financial markets will respond positively to the sale of Hershey Foods Corporation in a way that demands for the stock will increase which will, in turn, increase the price of the Hershey stock. The implications of my decision for the sale of the trust entire stake in Hershey Foods Corporation in the short term are as follows: The stock price of Hershey stock will increase from the pre-announced stock price of $63 per share to The proposed sale of Hershey Trusts entire stake in Hershey Foods would mean that the whole corporation was up for sale, therefore Hershey Foods Corporation will no longer exist as an independent entity since it will be sold and owned by another company.

The concern among the board members that the trust was compromising its fiduciary responsibility by concentrating a disproportionate amount of the endowment fund in the shares of Hershey Foods Corporation would be put to rest since the trust was selling its majority stake in Hershey Foods Corporation. Hershey trust will no longer have a controlling interest in every major Hershey entity, for example, Hershey trust will no longer hold a 77% stake in Hershey foods Corporation would be bought for a total of $12. 5 billion which comprised of $7. 5 billion in stock and $5. 0 billion in cash by Wrigley and be renamed to Wrigley Hershey or it would be bought by Nestle S. A and Cadbury Schweppes PLC at $10. 5 billion.

The implications of my decision to sell the trust's entire stake in Hershey in the long term are as follows. The sale of the trust entire stake in Hershey Foods Corporation would garner much higher premiums of 42% from Wrigley and the premium from Nestle-Cadbury Schweppes Hershey trust company would invest all the profits from the sale in a variety of U. S equities and fixed income and international securities to provide more straight lines of return and not the volatility of one stock.

Hershey products would be sold internationally by the bidding companies for example Wrigley was assuming it could put Hershey products into its product mix and sell them internationally in more than 150 countries since Wrigley had been successful selling chewing gum internationally and was hoping to do the same with Hershey's chocolates.

According to Kaplan (2006), empirical evidence suggests that returns on acquisition announcements are informative about the subsequent success of the acquisitions in addition to this Kaplan and Weisbach (1992) as cited in Kaplan (2006) argue that acquisition announcement returns are positively related to the success of the acquisition, this implies that if the return on the announcement of the acquisition is positive then the acquisition is bound to be a successful one and on the other hand a failure if the acquisition announcement returns are low.

Therefore due to the fact that there was a positive return to the acquisition announcement my decision to sell Hershey Foods Corporation will lead to a successful acquisition of Hershey by either Wrigley or Nestle S. A., Cadbury Schweppes.

Mitchell and Lehn(1990) as cited in Kaplan (2006) focus on acquirer returns and find that acquirers with the negative return are subsequently significantly more likely to receive a hostile takeover in the case of Hershey the acquirers will get a positive return therefore the takeover will not be hostile but rather peaceful. The deal from Nestle-Cadbury Schweppes included introducing new production facilities and distribution capabilities in the United States and they expected to reduce costs by consolidating operations and reducing workforces (Hershey foods corporation: bitter times in a sweet place). This meant that many of the Hershey employees would lose their jobs.

Sale of Hershey Trusts Outstanding Shares in Hershey Foods Corporation

Assuming the majority of the Hershey board takes my side of the vote not to sell the Hershey stock the financial markets will react to my decision in the following way Considering the fact that following the news of the announcement of the sale of Hershey Trusts outstanding shares in Hershey Foods Corporation, Hershey stock price soared from $63 to $79 per share, the news that Hershey trust will no longer sale its outstanding shared in Hershey Foods Corporation would have a negative effect on the share price in a way that the share price will drop back to the pre-announced stock price or even lower than the pre-announced stock price of $63. Due to the fact that when the deals fell through the share price of Hershey stock dropped sharply and by October 1st Hershey's shares traded at $62.

10 per share (this shows that the financial markets will react negatively to the decision of the board of not selling its entire stake in Hershey foods corporation which means that the demand for the Hershey shares will drop which will lead to a reduction in the share price in this case as low as $62. 10 from the preannounced share price of $63 per share. The decision of turning all the bids down and not selling Hershey has the following short-term implications. Hershey employees will get to keep their jobs in the short term assuming the majority of the board takes my side of the vote and decide not to sell the trust's entire stock in Hershey Foods Corporation.

The decision of the Hershey trust not to sell its entire stock in Hershey foods corporation would mean that the corporation will not be up for sale which means that the trust will not explore a potential sale. Both the offers from a joint bid of $10. 5billion from Cadbury Schweppes P. LC and Nestle S. A and an independent bid of $12. 5billion from the Wm. Wrigley Jr. Company will be turned down by the Hershey trust. The Milton Hershey Schools holdings will all be concentrated in Hershey stock as a result of the board taking my side of the vote not to sell Hershey Food Corporation.

The decision not to sell Hershey foods an American icon and the paternalistic benefactor of a town will not produce a groundswell opposition from local businesses, employees, and politicians because Hershey would not become part of someone else's global empire. The legacy of Hershey's involvement in the community would not be compromised and many of the Hershey employees will get to keep their jobs since Hershey Foods Corporation will not be up for sale. The rights to the two brands of kit kat and Rolo from which nestle received royalties for their US sales will be retained by Hershey since the ownership OF Hershey was not to be changed because the agreement stated that a change of ownership of Hershey would transfer all rights to the two brands back to nestle.

The decision of not selling the trust entire stake in Hershey has the following long term implications: Wrigley management would not put Hershey products into its product mix to sell them internationally as some analysts had speculated and Wrigley would not be able to generate higher sales volumes like the management had hoped to had the sale of Hershey been successful. The decision not to sell the trust's entire stake in Hershey Foods Corporation would mean that Hershey will not receive the much higher premiums of 42% from Wrigley and the premium from Nestle-Cadbury Schweppes.

Hershey Pennsylvania would not be made the headquarters of Cadbury Schweppes operations in the United States and therefore it will not be called the chocolate capital of the world with new production facilities and distribution capabilities in the United States as the provisions included in the deal from Nestle-Cadbury.

Is Hershey Pennsylvania Truly a Unique Place?

As quoted by the business world magazine (1903) Pennsylvania or Hershey Pennsylvania is A Model Town, a modern factory, a substantial business, these are the realizations of one businessman's dreams. The story about the way Hershey Pennsylvania came to be is nothing but amazing! In 1901, when Milton Hershey saw that his company had outgrown his expectations and the Lanchester factory had become too small, it was he decided that a new location was needed. Various locations had been considered like New York City, Baltimore, and also New Jersey. Milton Hershey concluded that the countryside would be the best alternative and his birthplace Derry church was to him the best place for a new location and to start a new community.

Hershey Pennsylvania can be considered a distinct place due to the fact that out of many towns that had been considered to be home to a new factory, it was the one that was chosen despite the odds that fell against it but the most distinctive reason that Hershey Pennsylvania is considered to be unique is the mere fact the whole town was named after an industry called Hershey and the whole town revolves around it. It controls the way in which people leave their lives as most people are employees of the industry and their children are students at Hershey school. Only a few other towns that have unique names are in existence. There is the oatmeal town in Texas, Oatmeal, is the second oldest town to date in Burnet County, Texas.

The town was supposedly named after a German family called the Habermills which is a German name taken from the word Haber meaning oats. Though oatmeal it does not have a whole industry to its name it is one of those unique towns that is involved with its community (Oatmeal Texas,2009). Can you think of other communities threatened by economic growth? Whilst it is clear that the Southeast Asian region attracts both foreign and private investments in the agriculture sector, the drawbacks of this success are greatly felt by farmers in that region. In Manila, Philippines, farmers have been experiencing a lot of forced eviction as they are displaced at the wills of others and not of their own.

In addition to that, the farmers in that community experience land grab as well as labor practices that are far from fair. The most devastating thing about the issue that is in the Philippines is that the private investors have given their backs to the farmers other than lending them a helping hand (Reyes, 2012). According to the Amnesty international media briefing, 2012, in the developed world of China, It has become their motto to strive for economic growth regardless of what the costs are. China has been seen to prioritize economic growth over important aspects issues live political rights and all civil-related issues. Human rights have been suppressed and used as a catalyst for rapid economic development.

The situation has escalated up to the point that human rights lawyers, as well as activists in China, are constantly experiencing severe intimidation, harassment, assault, and sadly they are even disappearing and held under house arrest facing criminal charges for protecting the rights and purgatives of others. Moreover, the number of forced evictions has continued to rise from the year 2010 to date. One would think that the government would do anything to protect its people but the communist party In China shows gratitude to local officials that enhance economic growth by any means possible. The most noticeable changes are land redevelopments building of new roads factories and more as they are seen to be activities that generate the most visible results.

These activities have to lead to deaths, severe beatings, harassment, and also the imprisonment of the residents who have been forced from their homes and across the country in the urban as well as the rural areas. The people of these communities get so distraught that they set themselves on fire as a sign of protests. The latest case of self-immolation that resulted due to economic growth and forced eviction was in Hunan Province in mid-October 2012. According to Lopez and Galinatio; 2004, the community in the Amazon rainforest Brazil has also been threatened by economic growth. In Brazil, the government introduced policies that were made to open Amazonia for the purpose of human settlement and to encourage agro-industrialization.

Unfortunately, these played a key role in the increased deforestation and displacement of the indigenous people of that region as the place that they knew as the home was being destroyed. Other developments that caused the loss of the Amazonian rain forest were: the major road-building projects, the settlement schemes sponsored by the government. Should we protect the town of Hershey the same way we protect the rainforest or endangered species? Ethically and on moral grounds, both Hershey and the rainforest should be protected as they are important and add value to humanity. Hershey should be protected simply because it has a lot of people that are depending on it. If the town of Hershey was not protected, the results would be severe suffering of the people in its community.

Hershey has over 6000 people that are employed in the Hershey industry; these people have families that rely on their support. If Hershey for any reason was not in existence anymore, unemployment rates in the region would go up, children will be out of school and all the developments that have come about over the years due to the Hershey industry would be abandoned. In a simple phrase, the lives of people would be destroyed. Hershey over the years has grown so much and the community that it represents is not just in America but has stretched out to as far as Africa picking up the pace of farmer as well as family development in West Africa, which at present is where 70% of the world's cocoa is grown.

Hershey is a town that has plans to invest an outstanding figure of $10 million over the next five years to West Africa with the sole purpose of enhancing community development and lending a helping hand to farmers and their families. In addition, Hershey all want to work with the rainforest alliance in order to collaborate with the Rainforest Alliance to offer cocoa farmers training that will highlight to them the impact of climate changes globally and how to eliminate child labor and thus increase literacy (Hershey expands responsible cocoa community programs in West Africa,2012). Why shouldn't we protect the town of Hershey? There is absolutely no reason not to as it has been the source and the beginning of positive changes all over the world.

Hershey does not only safeguard the population that it has but the millions of people across boundaries experience the benefits that have come about due to the existence of this town. In addition, the rainforest should also be protected in the same way. Rainforests provide us with the renewable natural resources essential to our living and breathing. Food, shelter, and medicines are sourced from our ever undervalued rainforests. Seeing that both the rainforest and Hershey add significant value to human life, both must be protected equally.

Changes in the Hershey Trust Board Structure Over the Past 10 Years

Hershey had mainly put its focus on the school than the business itself. Whereby the business was at greater risk and was in need of the full attention of the trust's board. However, the board had a different approach most of the board members even attended school at Milton Hershey School. The suggestive information that has been provided to us at first after analyzing the professions those in the trust's board in 2001 to 2003 as indicated by Hershey annual reports. (2001). The capacity of their knowledge might have caused the impact of the change. For example just to highlight a few like Joan S. LipsitzPh. D whose an independent education consultant and Anthony J Colistra superintendent.

The professions paid more attention to the school whereby Hershey was almost at its downfall and was in need of professionals that knew the business. It was not meant to be based on which people supported the family but on those who wanted to support the company's progress. As Hershey was facing its own crisis which was an assumption that Wrigley's offer appeared rich. Critics are of the view that Hershey chocolate would not find much favor from the non- American tastes highlighted by Askegaard and Bengtsson. (2005). As suggestive evidence has been provided at one point Hershey was one of the leading companies in gum in 2001. However, Hershey had a number of rivalries for example.

M&M Mar Inc	17.1% shares
WringleyJrCor	6.6% shares
Nestle	6.5% shares

These companies used a more aggressive approach furthermore forcing Hershey to have new innovations put in place for example information technology and manufacturing systems. As a result, a number of innovative approaches have been introduced as they have reduced cost giving a great competitive advantage as informed by Lanskoronskis, et al. (2009). Hershey Trust's board tried to create a balance as a result of a competition that demanded a continuous development of more innovative ideas. Change has forced companies like Hershey to be flexible resulting in the realization of improvement needed.

However much attention will be on the case study exhibit 5 and 6 will start by looking at the net sales, which are defined as the actual sales that have been generated by Hershey. Furthermore it gives an accurate picture or on how much money which will be expected to be received by the company. Evidence has been provided from 2002 to 2012 they have been a variation in the figures 2002, 2003, 2004 it can be said to be constant and for 2005 to 2012 that's when the rapid change occurred marking an increase which had an impact on the net operating as highlighted by Hershey annual reports. (2002). Hershey is a well-established company it will anticipate on higher earnings.