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Hershey Foods Corporation Bitter Times in a Sweet Place Case Solution
The primary issue, in this case, is that the business's biggest shareholder, the Hershey Trust, has opted to sell its interest, thereby putting the company up for sale. Hershey got two significant bids. The first was a combined offer by Cadbury Schweppes PLC and Nestle SA, while the second was an independent bid by the Wim Wrigley Jr. Company. This was a critical issue for the corporation, as it centered on Hershey's true corporate value and which course of action would best honor Hershey's tradition of community service. There are three possible solutions to this problem: accept the combined offer, reject the independent bid, or reject both bids. Accepting one of the offers would enable the Hershey Trust to reinvest the funds in a far more diverse manner, which would be safer for the orphanage for which they are responsible. This is in keeping with Hershey's legacy since he wanted to care for the community and guarantee its well-being. On the other hand, it may not respect his legacy if the sale results in the loss of employment for a large number of people in Hershey, Pennsylvania. Hershey employs more than a quarter of their population and selling the firm would jeopardise their livelihood. The corporation may even reject both proposals. This is beneficial since it would offer employment stability for residents, which Hershey would have desired. However, this would expose the orphanage to risk, and the firm would still need to follow a diversification strategy to ensure its continued viability.
Following questions are answered in this case study solution
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? Discuss the unique challenges presented by the ownership structure of Hershey.
Based on your valuation of HFC, do you believe the company was fairly valued by the market before the announcement of the sale? Calculate the WACC for HFC using the data provided in the exhibits; assume a Market Risk Premium of 5.5%. Estimate the stand-alone value of HFC using the free-cash-flow projections provided in case Exhibit 10.
Discus the non-price considerations of the offers. 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?
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?
Case Analysis for Hershey Foods Corporation Bitter Times in a Sweet Place
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? Discuss the unique challenges presented by the ownership structure of Hershey.
It is a duty and a commitment to give care and reliability to the shareholders of a corporation that comes with being a member of that organisation. This would need the use of sound business judgment by the directors or executives of the firm when making choices that would benefit the partnership. My fiduciary obligation as a member of the Hershey Trust board of directors would be to the community if I were in that position. My first reaction would be to act on an idea that will ultimately benefit the general public since that is exactly what Hershey Milton would have done as well. It would be in his best interests to enable the firm to continue to expand and increase in size.
As seen in the Milton Hershey case, he devoted his whole attention to Hershey Co. and established a level of care that he continued to uphold. After years of saving and collecting all of the profits, he was able to acquire property and construct the Hershey Factory in 1908, which marked the beginning of his company's existence. Milton Hershey had a highly optimistic view of life and a very good attitude toward his team. Despite the fact that revenues had dropped by 50%, he did not want to terminate or otherwise dismiss his employees.
Stocks are often issued by corporations in order to raise capital. An investor, who is subsequently known as a shareholder, purchases a portion of the organisation in order to do this. Many organisations have been established in Milton Hershey, including the Hershey Chocolate Company and the Hershey Transit Company. These were held in secret, with only a small number of stockholders having the ability to swap or trade their equities discreetly. The Hershey Park amusement park in Pennsylvania is another example, which was made possible thanks to a personal investment made by Milton Hershey himself. Despite the fact that Milton Hershey was the primary owner of all of these businesses, they continued to function independently.
2. Based on your valuation of HFC, do you believe the company was fairly valued by the market before the announcement of the sale? Calculate the WACC for HFC using the data provided in the exhibits; assume a Market Risk Premium of 5.5%. Estimate the stand-alone value of HFC using the free-cash-flow projections provided in case Exhibit 10.
In my opinion, the valuation of the company was fair which was done before the sale announcement was made. The value of the share came out to be $62.82. This calculation involved several steps. The first step was to calculate the free cash flows of the company. The FCF was calculated by taking the Net Operating Profit After Tax (NOPAT) and then subtracting Capital Expenditure (Change in PPE) and Change in Net Working Capital (Current Assets – Current Liabilities).
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