Hershey Was a Sweet Target Stuck in Bitter Controversy: Politics and Internecine Struggles Obscure Strategic Stakes in a Likely Megadeal

In the end, the m&a market decided that the bitter and sometimes bizarre struggle for control of the iconic Hershey Foods Corp. Or at least that’s the story proffered by the charitable trust that controls the largest U.S. confectionery firm when it suddenly shifted gears in mid-September and pulled down the for-sale sign after rejecting two mega-bids. The surprise top bidder was identified as chewing gum leader Wm. Wrigley Jr. Co. with an offer of $12.5 billion in cash and stock, well ahead of the European-based team of Nestle AG and Cadbury Schweppes PLC, which bid $10.5 billion, or at the low end of the projected purchase price range. Hershey Trust, which controls about 70% of the chocolate firm’s voting power, said that the stock it would have gotten from Wrigley would not have allowed it to diversify its assets, the primary purpose for triggering the sale process in July. Although a giant acquisition is uncharacteristic of Wrigley, the generous bid underscored the strategic power at stake in expanding its basic one-product focus to a larger role in the candy store with a stable of brands, such as the eponymous Hershey bars and Kisses, Reese’s, Jolly Rancher, Peter Paul, Kit Kat, and enough other products to fill a well-stocked candy counter. The strategic imperative of a potential deal had been eclipsed publicly by a firestorm that seemed to turn on everything but business issues. If nothing else, the bidding established some pricing rationale for Hershey and left a question of whether the sale was shelved only temporarily and might be revived at a less hectic time. It also put the spotlight on Wrigley as a serious acquirer. The fight to prevent logical and well-heeled bidders from stepping up to the plate and bidding involved a unique series of court actions and other developments laced with hefty political stakes and the exposure of long-simmering acrimony among key players in the so-called Hershey family. Dealmakers and m&a lawyers say that there probably never was a controversy of this type plaguing an acquisition, and there may never be again. As a result, they don’t look for much broad or bright-line guidance to emerge. One key reason is that the litigation side of the fight was fought not under corporate law but Pennsylvania statutes covering trusts and charities. Another is that the primary legal thrust was not against the Hershey Foods board but Hershey Trust, the controlling shareholder in the company that directed that a sale be conducted. Spearheading the court challenge was Pennsylvania Attorney General Mike Fisher, whose agency supervises trusts and charities, and who happens to be the Republican candidate for government. More than one observer believes that politics goaded Fisher’s dogged opposition. According to polls, he is trailing his Democratic opponent, former Philadelphia Mayor Ed Rendell, and desperately needs big margins in the gut-Republican territory of central Pennsylvania that surrounds the Dauphin County community of Hershey where the company is headquartered. “If Fisher doesn’t win this case, he’s toast,” said one observer. Fisher won a preliminary round when he persuaded Dauphin County Orphans’ Court, which regulates trusts at the judicial level, to issue a temporary restraining order halting the trustees from proceeding while broader matters were being argued. The trustees appealed to the next judicial level, the Commonwealth Court and that’s where it ended when the plug was pulled on the sale. In a companion complaint, Fisher asked that the Orphans’ court put itself in a position to rule on any ultimate sale of the company and determine whether the transaction is in the “community interest.” Lawrence Hammermesh, professor of corporate law at Widener University School of Law, says that complaints to stop or demand corporate sales usually are triggered by shareholders and targeted directors. In this case, he notes, the legal action was directed at the number one shareholder. Hershey, he notes, is incorporated in Delaware. A case in that state would likely have had to be brought under corporate laws and involve the responsibility of corporate directors in the deal. Fisher, however, was not aiming at the corporate board but at the trustees who initiated the sale, and he tried to leverage his power as head of the state agency that regulates trusts. The complex proceedings went to the structure of the trust and its relationship to the company and other players in the deal. The trust was set up by company founder Milton S. Hershey, who died in 1945, to finance the Milton S. Hershey School, which traditionally cared for orphaned children but later broadened its scope to disadvantaged youth in general. The trust’s chief asset was a controlling interest in Hershey Foods, and trustees in July said that the sale of the company would allow them to diversify their assets. Further complicating the issue and ratcheting up the political stakes for Fisher was the attitude of the unique community of Hershey, which feared a loss of jobs from a sale of the chocolatier. The series of events also exposed a not-so-happy family within Hershey, with the trustees, the alumni association of the school, and the company’s executive corps and board members choosing up sides. The alumni group, for example, joined the legal action by asking that it be placed in charge of the Hershey school students, in effect stripping the trustees of that authority. Still unclear was whether the alumni association and Fisher’s office started the whole affair, only to have it snap back on them. This much is known. The alumni and the trustees long have feuded and the association asked Fisher’s office to investigate the trust’s conduct. According to some accounts, a Fisher deputy warned the trustees that they were involved in conflicts and put pressure on them to diversify their assets. Fisher denied that trustees were pressured to sell Hershey Foods. Fisher’s public information spokesman did not return telephone calls for comment. While the emotional slugfest with its political and social overtones caught most of the attention, some pretty good m&a tactics were being demonstrated with less fanfare by likely bidders. Nestle, for example, conceded that if it did submit a winning bid it probably would run afoul of U.S. antitrust regulators. A small factor in the U.S. market at present, with about a 12% share, Nestle would have jumped past the 50% mark had it bagged Hershey. That led to the teaming with Cadbury, with the probability that Hershey’s business would have been split between the club members. Yet, all of the usual suspects played it close to the vest, declining to reveal exactly whether they planned to bid at all while they waited for the distracting legal storm to pass over. p