Hershey

This case will be evaluated from two perspectives: Firstly, the economic decision and secondly the governance decision. The Hershey Trust Company faces the decision whether it is appropriate from an economic standpoint to consider the two bids by competitors and if it meets the original mandate from Milton Hershey.

First, the situation will be evaluated from the economic and strategic perspective of the two bids of Nestle and Wrigley.

The economic evaluation is based on a Cash Flow Projection (NPV) and the Enterprise Value of Hershey. Based on the NPV of the Cash Flow calculation Hershey is valued at $9,260 (Attachment 3) which equals $62.41/share, and based on EV the value amounts to $10,720 ($80.40/share). Both calculations have been based on case information and assumptions were held minimal. The variance in value from these two methods can be explained by the overvaluation of the industry. Hershey is overvalued (based on a stock price of $73.81) using the discounted Cash Flow Model and undervalued using the Enterprise Value. This is an indication that the industry is over valued, relative to its fundamentals. This is true for all the players involved in the possible acquisition (based on EV, except Wrigley) as seen in (4) Exhibit EV.

Wrigley Bid

The Wrigley offer looks compelling at its first look with $89/share which represents a 42% premium. Considering both valuations, the offer exceeds the value obtained by the projected Cash Flow calculation by $26.9 and the EV/share of $80.40 by $8.6. The pure economic aspect of this offer makes it therefore very interesting and justified. On the other hand it has to be considered that the $12.5 billion offer would be paid out in 5 billion in cash and $7.5 billion in stock of the new company. As seen in Exhibit (5) WM investment this is the downturn to the offer for the Hershey Company Trust. The entire intent of selling Hershey is to increase the diversification of its assets. With $7.5 billion invested in the new company, the Hershey Company Trust would still be highly depended on one major investment with a share of 31.7% in the new company. This defeats the whole purpose of divesting in Hershey Foods.Additionally, there is no strategic fit between these two companies; Hershey does not fit into Wrigley's key objectives. One of Wrigley's objectives is to boost its core chewing gum business which is not necessarily Hershey's core business or strength. Hershey's Food competency lies with the chocolate business. Furthermore there are no expected synergies from a cost perspective which minimizes the possibility of value added drastically. Wrigley's expects higher sales through the acquisition of Hershey, but not other synergies. This draws the conclusion that the merger of these two companies does not add value, neither to Wrigley or Hershey, to justify the acquisition. There would not be any value added other than the current value of Hershey's, since no synergies or cost savings can be expected.

To summarize, this offer is not worth pursuing since there is no strategic nor investment risk fit.

Nestlй/Cadbury Bid

Nestlй/Cadbury offers $10.5 billion in cash for Hershey Foods which represents $75 per share. This bid is much lower than the Wrigley but has the benefit of the cash payment. The offer exceeds the NPV of the projected Cash Flow, but is lower than the Enterprise Value.