Hershey Foods

Time to Kiss and Makeup

Prepared by Research Assistants Laura A. Castrillo and Michaelynn M. McCoy under the direction of James S. O’Rourke

Overview

• Introduction• Company

– Milton Hershey– CEO

• School• Trust• Key Events• Stakeholders• Challenges

The Players

Hershey Trust Company

Milton Hershey School

(non-profit)

Milton Hershey School Trust

M.S. Hershey Foundation

Hershey Foods Corporation (31% owned)

Hershey Entertainment and Resorts (100% owned)

Hershey Theatre

Hershey Museum

Hershey Gardens

Hershey Community Archives

For Sale ?

“As painful as it is, we are asking the company to put itself up for sale”

July 25, 2002

“Sale talk is over”

“The trust board has rejected all the bids it received. It is asking the company to end the process of exploring a sale”

September 18, 2002

Hershey Foods

Hershey Foods

• Located in Hershey, Pennsylvania

(pop. 13,000)

• Company Groups:– Chocolate and Confectionary– Restaurant Operations– Other Food Products and Service

• 43% of the Domestic Chocolate Market

• $4.6 billion in sales in 2001

Milton S. Hershey

• Born in 1857• Opened chocolate factory in Derry

Church in 1905• Plans for building town at the same

time as building factory:– Sweetest Place on Earth– Cocoa and Chocolate Avenue– Hershey Kisses lampposts

Milton S. Hershey

“If the wrong people or organization get control, they can spend or give away more money in a short time than I have made in my life, to build monuments unto themselves, for their own financial gains, ego, and recognition.”

CEO Richard Lenny

• Became CEO in 2001• First outsider to run company• Former Group vice president at Kraft Foods • Cost cutting plans:

– close plants– cut jobs– outsource cocoa production– April 2002 six week strike over health care

• Profits for the January to March period rose 10%

“The whole air about him is the fact that he is just corporate greed”Bruce Hummel, head of Hershey's union branch

“I’m here to do what the shareholders want me to do, which is to increase shareholder value”

Richard Lenny

Hershey Trust Company

• Established in 1905• Robert C. Vowler, Chief Executive

Controlled by 17 member board, 7 PA residents

• School Trust is $5.4 billion• 58% Trust in Hershey Foods Stock

– 31.4% of outstanding shares– 76% voting – Once the Trust's stake drops below 15 percent

the shares it owns, revert to Class A shares, which have one-tenth the voting power

Hershey School

• 1,200 students • 10,000 acre campus• $65 million annual

budget ($96,000 per student)

• Provides education, health care, room & board for disadvantaged children

“The main object…is to train young men to useful trades and occupations so that they can earn their own livelihood” Deed of Trust

Key Events

• Early Spring 2002– Lenny refuses to sell the company– Proposes to sell Trust’s shares to the company– Trust threatens to fire Lenny

“We’re going to sell this with or without you”

• July 25– Hershey publicly announces it is seeking a buyer

Letter from Lenny to employees

“I'm terribly disappointed that we may not be able to see it through as an independent company. I came here to build our brands and build our people, not to manage a potential sale and subsequent integration process. Having been your CEO for only one year, I had hoped to work with you for a long time to come.”

Key Events

• July 30 - Opposition begins

– “Milton Hershey must be rolling over in his grave. He believed very strongly in the community of Hershey, in protecting it. I'm all for food industry consolidation, but this one surprised me."

John M. McMillin, analyst at Prudential Securities

– “Derail the Sale" campaign• planting signs on front lawns• rallies • petitions

– "We're not here to mourn; we're here to organize."

Ric Fouad, Head of the Alumni Association

Key Events

• August 8 – Government officials get involved

• August 17 – Bidding begins

• Wrigley ($12.5 billion)• Nestle and Cadbury Schweppes ($11.2 billion)

• September 4 – Injunction prohibiting Sale

• September 17 – Trust abandons sale

Stakeholders

• Employees • Other investors• Community• School• Government officials• CEO Lenny• Trust board members• Competitors

Challenges

• Would it be better for the long-term financial health of Hershey Foods, its employees and the Hershey School if the company were sold rather than remain in the hands of the trust? Does the trust’s decision to forgo selling the company enhance Hershey’s stability?

• What are the critical issues facing Richard Lenny as he positions Hershey Foods for the future? Who are the constituents he must address?

Challenges

• How does Lenny approach the strained relations with investors? What should his message be?

• Is it possible for the community of Hershey to exist in the 21st Century? What responsibility does Hershey Foods have to the community?

Challenges

• Could the outcome of the sale process have been different if the Hershey Trust Company had anticipated public reaction? If so, what message and approach should they have employed?

What’s happened since?

• Reformation of Trust board -17 to 11 members– 10 board members (including 7 members who twice

voted to sell the candy maker) are leaving the board– Adding 4 new members who live locally– Added Richard H. Lenny, Hershey Foods CEO

• Majority of 6 new members must live in central Pennsylvania

• Bill passed placing restriction on charitable trusts wanting to sell their holdings

• Mike Fisher lost his election bid for governor

What’s happened since?