After months of negotiations and two rebuffed bids, Mondelez International Inc. gave up its summer-long courtship of the Hershey Company near the end of August 2016.1 The $20-plus billion bids were noteworthy for Mondelez’s persistence in attempting to unite the two confectionary giants. Mondelez’s failed takeover highlighted the continuing importance of the Hershey Trust Company, the charitable foundation which is the chocolate maker’s controlling shareholder. The Trust has historically scuttled the Company’s deal-making. But recent corporate governance scandals have left the Trust in a transitionary period, with a reconstitution of its board of directors to be complete by the end of 2017. This reconstitution allows the possibility that the Trust may be more willing to approve Hershey’s sale in the future. This blog post uses Mondelez’s failed bid to examine the secretive Trust in more detail. It explains the bid and describes the Trust and the role it has played in maintaining the company’s independence. It also discusses the recent scandals plaguing the Trust’s board.
Mondelez’s courtship of Hershey took place over the summer of 2016. Mondelez’s initial June offer was $107 in cash and stock for every Hershey share, which represented about a ten percent premium over Hershey’s stock price at the time. The Mondelez-Hershey combination would have created the world’s largest candy company. News of the bid sent Hershey’s stock soaring 21 percent, but the Company’s board unanimously rejected the offer.2 Mondelez subsequently raised its offer to $115 per share, but this bid was also rejected.3 Two stumbling blocks plagued the negotiations. For one, Hershey would not seriously consider a deal below $125 per share. The second reason was the uncertainty surrounding the Hershey Trust.4 The Company told Mondelez that a transaction could not seriously be considered until the Trust’s board’s reconstitution finishes at the end of 2017.5
The failure of the deal is significant because of the blockbuster nature of the proposed deal. The combined company would have united Hershey’s chocolate empire with the multiple billion-dollar brands controlled by Mondelez, including Oreos, Nabisco and Cadbury. The companies complemented each other well, as Hershey receives nearly 90 percent of its revenues from North America, whereas Mondelez has more of an international footprint. A deal would have allowed Hershey to diversify its mostly U.S. candy business to international markets and a broader product line. Analysts speculated that the combined company would have seen a sales increase of between 9 percent and 19 percent.6
That a charitable trust is the controlling shareholder of a major public corporation may seem odd. But Hershey is not an ordinary public company, and its small-town Pennsylvania roots remain important to the Company. In addition to founding the chocolate company, Milton Hershey (and his wife) founded a boarding school for at-risk youths, the Milton Hershey School, which continues its mission today. The School’s operations are funded by the Milton Hershey Trust, a Pennsylvania charitable trust worth about $12 billion. The Hershey Trust Company is trustee of the Milton Hershey Trust. The School is funded to a significant extent via distributions from the chocolate company.7
The Trust owns about 8 percent of the chocolate company’s shares, but because of a dual class stock arrangement it controls about 81 percent of the votes. The School’s reliance on the company’s fortunes has allowed Hershey to maintain its independence, potentially at the expense of lucrative business opportunities.8 Bob Fernandez, author of a 2015 book examining the Trust, referred to the Trust as “the power behind the throne,” noting that few know the Trust’s board members but that “they are the ones behind the scenes who control what will happen to the largest chocolate company in the country.”9 And the Trust has shut down numerous potential deals in the past, including ones involving Nestle, the William Wrigley Jr. Company and Cadbury.10 The Company has so far in its over one-hundred-year history preferred to remain independent due to its importance to central Pennsylvania and to the School its profits help to fund.
But the Trust has recently been under fire related to numerous corporate governance scandals. The Trust’s chief compliance officer was placed on leave earlier this summer after a leaked memo showed that the board had spent almost $4 million looking into board members’ conflicts of interests and insider-trading involving board members.11 In May, a prominent trust official pled guilty to wire fraud.12 In addition, in July the Trust agreed to a settlement with the Pennsylvania Attorney General stemming from the AG’s investigations into excessive compensation and conflict of interest-related improprieties among board members.13 The agreement stipulated in part that three board members step down by the end of 2016, with two more to step down by the end of 2017. As noted above, the board’s woes played a factor in shutting down a potential deal between Mondelez and Hershey.
One analyst noted that Mondelez “misread the situation” surrounding the uncertainty at the Hershey Trust and that their bid for Hershey “looks poorly planned” in hindsight.14 But is Hershey untouchable? Given changes in consumer tastes and Hershey’s reliance on the North American market, perhaps a future board may be more receptive to a deal.
Leslie Picker, Mondelez Abandons Its Effort to Combine With Hershey, N.Y. Times (Aug. 29, 2016), http://www.nytimes.com/2016/08/30/business/dealbook/mondelez-hershey-deal.html?_r=0. ↩
Craig Giamonna et al., Hershey Board Rejects $23 Billion Takeover Bid from Mondelez, Bloomberg (June 30, 2016), http://www.bloomberg.com/news/articles/2016-06-30/hershey-board-rejects-23-billion-takeover-bid-from-mondelez. ↩
Picker, supra note 1 ↩
Craig Giamonna & Ed Hammond, Hershey’s Failed Deal Renews Image as a Company Not For Sale, Bloomberg (Aug. 29, 2016), http://www.bloomberg.com/news/articles/2016-08-29/hershey-s-failed-deal-reinforces-image-as-a-company-not-for-sale. ↩
Annie Gasparro & Dana Cimilucca, Mondelez Drops Offer for Hershey, Wall St. J. (Aug. 29, 2016), http://www.wsj.com/articles/snack-maker-mondelez-drops-pursuit-of-hershey-1472503081. ↩
Jonathan Klick & Robert H. Slitkoff, Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off, 108 Colum. L. Rev. 749, 753-54 (2008). ↩
David Segal, Back-Stabbing and Threats of a ‘Suicide Parachute’ at Hershey, N.Y. Times (July 30, 2016), http://www.nytimes.com/2016/07/31/business/dealbook/back-stabbing-and-threats-of-a-suicide-parachute-at-hershey.html. ↩
Giamonna et al., supra note 2. ↩
Hershey Rejects $23 Billion Mondelez Takeover Offer, CNBC (July 1, 2016), http://www.cnbc.com/2016/07/01/hershey-rejects-23-billion-mondelez-takeover-offer.html. ↩
Picker, supra note 1. ↩
Giamonna & Hammond, supra note 3. ↩
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