Accounting Assignment: Hershey Group Diversification Policy Case Study

This case study analyzes the Hershey Group's diversification policy through the lens of a member of the Hershey Trust board. The assignment addresses fiduciary responsibilities to the Milton Hershey School, the influence of Milton S. Hershey's legacy, and the challenges of the company's ownership structure. It evaluates the validity of diversification as a reason for selling Hershey Foods Corporation (HFC), including a discussion of how diversification could have benefited the school earlier. The case includes a WACC calculation and DCF valuation to assess the market's valuation of HFC before the sale announcement. It explores non-price considerations of potential offers and asks the student to make a recommendation, considering the economic bids and the legacy of Milton S. Hershey. Finally, the assignment considers alternative strategies if the bids were rejected, emphasizing organizational structure changes and the importance of ethical business practices.

Accounting
Assignment

1
A Case Study
On the Diversification Policy
Of the Hershey Group
Prepared By
Student Name:
Date: 18th December, 2018
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Table of Content
s
Answer to question No. 1............................................................................................................................2
Answer to Q No. 2.......................................................................................................................................3
Answer to Question No.3............................................................................................................................4
Answer to Question No.4............................................................................................................................5
Answer to Question No.5............................................................................................................................6
Conclusion...................................................................................................................................................6
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Answer to question No. 1
In this case being the member of the Hershey trust board, I owe my fiduciary responsibility
towards the Milton Hershey School, the primary objective of which was nothing but to serve
the noble cause of education, housing, food, clothing and healthcare of those boys and girl
students got admitted in the school without any discrimination based on their race. Hence
being the member of the trust, it is my fiduciary duty to hold and manage the property or
assets under trust in such a manner that can best serve the needs of its beneficiaries
(Principals) in form of its students.
The effect of the legacy of Milton S Hershey on my thinking can be well explained through the
fact that he though enjoyed money making through business, but always kept in mind that such
money generated through the business should always be used for the enduring good as was
reflected through a sign on his office wall read as “Business Is a Matter of Human Service. Even
for serving this humanity he was ready to compromise with the profit-oriented motive of
running the business rather was ready to bear any sort of loss even. Hence following his legacy,
the motive here would be to make the decision that can best serve the beneficiaries of the
Milton Hershey School no matter for which if some loss is caused then the trust should be ready
to accept the same.
As it is evident that the school holds the entire stock held by Milton S in the Hershey Foods
Corporation and the Hershey Trust Company was holding 77% of the stockholders vote and
31% of the Common shares of the Hershey foods corporation, and the school managers to
whom the trustees of the HTC needs to report and the members of the trust, who are same
individuals are 17 in number. Hence the major challenge as placed by this organizational
structure is that not able to take the decision of proposed selling of the HFC shares to the
proposed bidders through the help of an independent and unbiased basis as the personal
interest of these school managers cum trustees shall conflict with the overall objective of the
establishment of the trust.
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Answer to Q No. 2
No, in the given case the diversification cannot be said to be the valid reason for the sale of HFC
as it is evident from the exhibit 7 that though the Hershey’s share showed a variable
performance had outperformed the S & P -500 stock index on an average 6.8% per year and
trust’s investment portfolio showed the strongest growth too, it means that there was least
possibility that holding of the largest investment in the HFC by the HTC is not justified with the
fiduciary liability of the trustees towards its beneficiaries. When the trustees planned to use the
profit generated from the sale of the entire stake of HFC at one go to be invested in the Fixed
income securities to ensure a steady level of income only. Moreover, the chairman and the
CEO of the HFC, Richard H Lenny too offered for the buyback at the rate of 10% premium and
promised to help in selling of the rest of the shares of HFC in next three to five years. Hence the
reason of diversification does not seem to be valid.
In past there were lot of examples that evidenced that such diversification had benefitted the
school like in 1960 Hershey diversified by acquiring several pasta manufacturers that made it
the largest manufacturer of pasta in US in the year 1980. Similarly, in the year it undertook this
first acquisition of the H.B Reese candy company.
Answer to Question No.3
The DCF Valuation is given below:
Calculation of the WACC of the HFC
Cost of equity for HFC = Risk-free rate of return+ Beta (Market risk-premium)
=3.82%+.55(5.5%)
=3.82%+3.025%
=6.845%
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Total Market value of the Hershey as on 17-09-2002
Debt=$884.9millions
Equity=73.8*134.2
=$9904million
Total value of the Firm = $9904million+$884.9million
=$10788.9 million
=Cost of equity*value of equity/ Total Value of the Firm+ after tax cost of debt*value of debt/
Total Value of the Firm
=6.845%*9904/10788.9+4.691% (1-39.5%)*884.9/10788.9
=6.52%
Calculation of the standalone value of the HFC
=Present value of cash inflow/(1+r) ^n
=386.3/(1+6.52%)^1+433.2/(1+6.52%)^2+483.9/(1+6.52%)^3+508.1/(1+6.52%)^4+533.5//
(1+6.52%)^5+560.1/1+6.52%)^6+588.1/
(1+6.52%)^7+617.5/1+6.52%)^8+648.4/1+6.52%)^9+680.8//(1+6.52%)^10
=$3626.549 million or 3.26 billion
Hence it could be said that the based on this valuation the HFC was overvalued by the market
before the announcement of the sale.
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Answer to Question No.4
The major non-price consideration of the offers are as follows:
 The future strategy of the business of the bidder considering the present
market image of the Hershey. Hence considering this I would like to vote for
the offer provided by Wm. Wrigley Jr. Company of $12.5billion due to few of
its notable business strategy prescribed like Diversifying our product line in
“close to home” areas, Growing and developing our Wrigley people around
the world together with the fact that it is planning to continue the Hershey
products into its product mix irrespective of the fact of not able to achieve
the significant cost savings through such addition of Hershey’s product. At
the same time its core business value aligns with the legacy of Milton S
Hershey. At the same time the offer made by it in terms of monetary value is
also higher from its joint competitor.
No, my decision is not primarily based on the economic bid value of the
competitive bidders rather it has taken into the legacy of Milton S Hershey.
Answer to Question No.5
If it is being decided not to accept any of the bids and not sell HFC then for the purpose of the
achievement of the diversification objective, the first thing I would like to introduce would be to
bring the significant change in the organizational structure of the Hershey group in total so that
the fiduciary position may be safeguarded along with the legacy of the Milton S Hershey. As it is
the only reason of the problem that caused the thinking of selling of the well performing stake.
Second thing a thought could be made of limiting the stake of the Hershey trust in the various
Hershey group entities
If I choose to select any of the bids proposed by the competitive bidders then no matter what is
chosen , but the main message i would like to give would this that it is the business strategy
and the fundamental principles of ethics and humanity that can only ensure the long term
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survival with the steady growth performance not the core profit oriented mindset that can
satisfy the short term goal s of the business only.
Conclusion
From the above it is quite clear that the fundamental core values keeping which in mind late
Milton S Hershey laid down the foundation of the business helped the Hershey group to
establish itself as an international brand and in future this legacy of its founder should always
be kept in mind by the group in future before making any strategic decision to be taken.
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