Sweet Surrender There was much rejoicing when the town founded by Milton Hershey blocked the sale of his chocolate company. But was it really a victory?
By John Helyar

(FORTUNE Magazine) – On that Black Thursday in July when the trust that Milton Hershey founded put the company that Milton Hershey founded up for sale, the little town that Milton Hershey founded had a choice. The citizens of Hershey, Pa., could have paraded to the gravesite of Mr. Hershey, as they sometimes do in times of crisis, and mourned the passing of their way of life. They could have stoically accepted their fate, as Pennsylvania Dutch are wont to do, and prepared to turn over the keys to the town to Nestle. After all, this is the corporate America of the new millennium, not the century-ago world of Milton Hershey. That's just the way it goes, Mr. Goodbar.

Instead, the reaction of the good people of Hershey was so heated it could have melted the 33 million chocolate Kisses that the company produces daily. The week after Black Thursday, this town of 12,000 turned out a crowd of at least 500 for the first of what would be numerous acts of war. They trudged underneath the Kisses-shaped streetlights of Chocolate Avenue to the office of the Hershey Trust, ensconced in an elegant mansion that was once Mr. Hershey's home.

Here is what Hershey Trust owned: 11,000 acres of Hershey's land, 77% of Hershey's biggest company, and $5.4 billion of assets, with which it runs the ritziest orphanage in history, the Milton Hershey School. Here is what the protesters owned: hot air. All they had was angry speakers like Ric Fouad, president of the school's alumni association, who declared, "We're not here to mourn; we're here to organize." It was like the Munchkins marching on the Emerald City to call out the Wizard of Oz. The suits inside their mansion fortress might have been excused for murmuring, "Let them eat Kit Kats."

Today, the suits are eating crow. The trust did get two sweet offers for Hershey Foods: $12.5 billion from Wrigley and $11.2 billion from a combination of Nestle and Cadbury Schweppes. But pressured by the ragtag citizens' militia and chastised by a judge, on Sept. 17 it suddenly rejected both offers. For once, the almighty dollar had lost.

Late that night a resistance leader named Bruce McKinney got the news at home. He went outside and clanged a bell to wake his neighbors with the glad tidings. They came out to dance and drink in front of the DERAIL THE SALE signs that lined the street. It was like V-J Day in Chocolatetown Square the next morning, with citizens whooping and drivers honking.

The townspeople, you see, felt they hadn't just saved an estimated 3,000 jobs; they had reclaimed their legacy. Hershey is one of the last company towns in America in an age when most have gone the way of the nickel candy bar. But Hershey is much more than that. It's a unique place where company, community, and charity intertwine in a remarkable century-long social experiment. "Hershey is a quilt, made up of many patches of beautiful texture and fabric, woven very tightly together," says McKinney, who attended the Milton Hershey School and once served on the Hershey Trust board. "We weren't going to stand by and let someone tear apart the quilt. The community came together in a firestorm of protest to fulfill the prophecy of Mr. Hershey."

Mr. Hershey. People here use that honorific whenever they talk about him, which is quite a lot. It's as though he's still alive today, though he's been dead for 57 years. His birthday is celebrated each Sept. 13 in Chocolatetown Square, with a brass quartet playing at the bandstand and Kisses-topped cupcakes for all. His portrait is ubiquitous, and not just on walls. The fall fashion sensation here was a T-shirt bearing Hershey's picture and the words SAVE THE DREAM. He is invoked in debates about all manner of present-day matters, as in, "Mr. Hershey would have thought ... "

Here's what Milton Snavely Hershey thought one day in 1902, looking around a central Pennsylvania cornfield: This is it. He had sold his first business, a caramel company, for $1 million, and had decided to return home (the field was a mile from his birthplace) to build a huge factory and small town. He bought 1,200 acres to do so.

Milton Hershey wanted both to pioneer mass-production of chocolate, as his friend Henry Ford would do with cars, and to create a utopian community. If anything, he was more intrigued by the latter. He liked making money, sure, but he "wanted it used for a purpose of enduring good." (A sign on his office wall read, BUSINESS IS A MATTER OF HUMAN SERVICE.) Hershey was intrigued by the progressive industrial "garden cities" of England and decided to create an American version.

People thought he was nuts: a massive chocolate plant in the middle of a cornfield? Common factory workers living in tidy little houses instead of squalid tenements? A 150-acre park in the middle of town where they could have lunch? A $3 million community center with an ornate marble lobby? It was not only certifiably insane, but morally deleterious, scolded a 1934 FORTUNE story: "To give too much outright saps a community's self-reliance and injures its pride."

But if Milton Hershey was a great philanthropist, he was also a killer capitalist. He did very well by doing good, developing a fanatically loyal and hard-working labor force. What's more, he didn't have to compete for labor out here in the middle of nowhere. Nor did he have to compete for the huge supplies of milk required for milk chocolate: He was in the heart of dairy country.

The man's vision didn't stop there. He struck shrewd deals for cheap sugar in Cuba, buying 65,000 acres of sugar cane fields and building eight sugar-processing mills. Milton Hershey did have some 19th-century ideas about marketing: He refused to advertise, for example. But his company grew from $2 million in sales in 1907, when Hershey's Kisses were introduced, to $41 million in 1929. The community grew with it, from a population of 700 in the early days to 2,500 by the 1930s. It would have been bigger, but Milton Hershey limited home construction in order to preserve green space. Instead he built miles of trolley lines so workers could commute from neighboring towns.

Hershey wasn't actually a town, technically, and to this day it is an unincorporated part of Derry Township. But with Hershey Chocolate around, who needed government? The company built the houses and public buildings, ran the utilities and trolleys, and administered a junior college, which Hershey residents attended free. And the company positively outdid itself with recreation. Hershey built a lake-sized swimming pool; an arena with more seats than town residents; and an amusement park that charged no admission fee. (When Hershey Chocolate went public in 1927, the nonconfection operations were split off into another company--a private one--called Hershey Estates.) These enterprises were putatively for profit, but in reality they were for the employees. "This town was built on the sweat of factory workers, and Mr. Hershey knew that," says Joanne Lewis Viozzi, editor of the Derry Township Historical Society newsletter and the daughter of an early Hershey employee.

Nobody here knew how good they had it--nor, when the Great Depression hit, just how bad the rest of the country had it. Though Hershey Chocolate's sales dropped 50% during the 1930s, Milton Hershey wouldn't lay anyone off. He simply diverted employees to other projects, like building the elegant Hotel Hershey. According to one locally famous story, a foreman boasted to Mr. Hershey of a new steam shovel that could do the work of 40 men. "Get rid of the steam shovel," he retorted, "and bring back the 40 men!" (Of course, notes one of today's local businessmen, with a twinkle in his eye, old Milton may have figured out that the 40 men's wages were cheaper.)

By then, Milton Hershey had developed an even greater passion than his company or community: the Milton Hershey School. He'd endured a tough childhood, much of it with his father absent, and his heart went out to disadvantaged kids. In 1909 he and his wife, Kitty, founded a school for orphan boys. The school housed these urban ragamuffins in small group homes, scattered through the community and countryside; educated them and trained them in trades; and often turned around their lives.

Lou Bocian, who graduated in 1939, recalls the day when he first enrolled and reported to collect his school-issued clothes. There was Mr. Hershey. "He put his arm around me and said, 'From now on, we'll take care of you; you're one of my boys.' You don't know what kind of impact that had on a kid from Lebanon, Pa., who'd been out begging for food."

The "home boys," as the orphan students were called, filled a void for Hershey, who had no children and whose wife died young. In 1918, he gave the school all his Hershey stock and put it in a trust he had created. The stock was worth $60 million, and the trust succeeded Milton Hershey as majority owner of his company. Hershey Trust, as it was called, joined Hershey Chocolate and Hershey Estates as the town's key institutions, which we'll call the Hershey Trinity. Milton Hershey and his three top advisers, whom he called "the Swiss Guard," were on all three boards. Hershey was chairman of each. The boards were filled out with senior Hershey Chocolate and Hershey Estates managers. These tightly interlocked boards created the ties that bound together the Trinity.

But Milton knew that the construct was fragile. "Mr. Hershey was greatly concerned about the future of the organization, the town, and its people," wrote his physician and friend Herman Hostetter in a biography. "He said, 'If the wrong people or organization get control, they can spend or give away more money in a short time than I have made in my life, to build monuments unto themselves, for their own financial gains, ego, and recognition.'"

Something like that eventually came to pass. The amazing thing is that it didn't for a very long time. Milton Hershey died in 1945 at age 81. It wasn't until 1963, after his "Swiss Guard" had died, that the breaks with the past began. That year Hershey Trust took $50 million--about 20% of its assets at the time--and built Penn State University a medical center in Hershey. It was great for Penn State, of which the trust's top lawyer and the company's CEO were boosters, but it grated on townspeople. What would Mr. Hershey have thought?

They asked that a lot in the 1960s and '70s. "Little by little, it started eroding," says Thalia Stadulis, a 15-year employee of Hershey. Hershey Junior College closed. Milton's Taj Mahal of a community center was turned over to Hershey Foods for office space. Hershey Estates stopped running the municipal services, sold the utilities, tore down the ballroom, filled in the swimming pool, and started charging admission to the amusement park. It retained only the moneymaking tourist businesses, which were later renamed Herco (Hershey Entertainment & Resorts Co.) and became wholly owned by Hershey Trust.

The ties that bound the Trinity were loosening, partly because Hershey Chocolate's leaders couldn't devote the same attention to the community and school that they once had: They had their hands full trying to revive the company. It had languished for years after Milton Hershey's death, and M&M maker Mars surpassed it in market share in 1972 to become the nation's candy leader. Hershey had to get more aggressive. And in the '70s it did, acquiring a variety of businesses, changing its name to Hershey Foods, and starting to advertise.

As CEO in that decade, a "home boy" named Bill Dearden led some big changes in Hershey's operations. But he insisted that the company not change its values. "It was very much reinforced that ... we had a fiduciary duty" to the orphans, says John Dunn, who began working in Hershey's marketing department at the time. Each department at the company would "adopt" a student house at the school, which employees would visit.

However, Milton Hershey's hope that the home boys would one day lead the Trinity didn't come to pass. What he had seen as a confluence of interest was in modern times viewed as a conflict of interest. The boards of Hershey Foods, Hershey Trust, and Herco became more diverse. Hershey Trust started pushing for diversification of another kind too. It was uneasy with Hershey Foods' stock making up 80% of its assets. The problem was that Hershey kept performing so darned well. After rebounding from its early-1970s nadir, the company began gaining on Mars, from which it took the market share lead in 1988. Hershey ranks as the 28th-best-performing stock of the past 30 years, with annualized returns of 17.4%, according to a Money magazine study. To reduce the stock's weight in the trust's portfolio, the company agreed to five stock buybacks from 1986 to 1999, totaling $1.3 billion. But it also created a class of voting stock that ensured that the trust retained control.

In the '80s and '90s, the company grew ever more focused on the bottom line. CEOs Dick Zimmerman (1984 to 1993) and Ken Wolfe (1994 to 2001) were financial guys. Hershey Foods' board now consisted mostly of the independent directors a public company was expected to have. And they demanded good numbers, not good works. "I was being held to the same standards as at any company; I'd get my fanny canned if I didn't turn out good earnings," says Wolfe. In 1994 he ordered the first major workforce reduction at Hershey, trimming 400 jobs by offering voluntary retirement packages. "Some people were upset, but our fixed costs were simply too high," he says. "I changed the culture. No longer was everybody guaranteed a job."

Talk about shredded ties: A Hershey CEO was no longer even welcome on Hershey Trust's board. Soon after a former Iowa education chief named William Lepley was hired to head the Milton Hershey School in 1993, he tried to remove Wolfe and Herco CEO Bruce McKinney as directors. The board voted that down, but the two executives were thereafter isolated on backwater committees. When they retired from their respective jobs, their Hershey Foods and Herco successors weren't appointed to the board.

To people familiar with this poisonous relationship, Lepley seemed to resent the executives' higher status in Hershey and lack of deference to Hershey Foods' majority owner. Wolfe, for example, refused to let the school promote itself on Hershey candy wrappers. Trust spokesman Rick Kelly denies any animus, saying Lepley just wanted "to have more expertise [on the board] in education, child development, and residential issues."

Meanwhile, Lepley was jousting with the Milton Hershey School Alumni Association, which vehemently opposed many of his changes at the school. For example, the alumni accused school administrators of overspending on themselves (like Lepley's $500,000 salary) and underserving disadvantaged kids. Though the school had broadened its target student population--admitting girls and eliminating the orphan restriction--its enrollment had actually dropped 20% from its peak of 1,500. The trust's president and CEO, Rob Vowler, dismisses the complaints.

The townspeople started to protest alongside the home boys on issues that pressed hot buttons. Hershey residents raised hell when the school wanted to close a public road that had long run through the campus. And earlier this year the town rebuffed a downtown redevelopment initiative by Herco. Many residents found Herco's plans, including a 12-screen movie multiplex and a monorail, garish. (The trust withdrew the plan in June.)

As conflicts between the town and the trust increased, so did conflicts between the workers and the company. In the fall of 2001, new CEO Richard Lenny, a former Nabisco executive and the first outsider to hold Hershey's top job, raised hackles by closing three plants and offering voluntary separation packages to much of Hershey's management. (Lenny declined to comment for this story.) A far larger number than anticipated--about 600--accepted and on the way out the door muttered darkly about Lenny's seeming scorn for the Hershey culture. To lifers, the old bond between company, school, and community had suffused their work with meaning. Now that seemed to count for nothing. "You've got Lenny as an outsider and Lepley as an outsider, and you kind of wonder if they really understand what Milton Hershey's ideals were," says Bruce Hummel, a business agent for the chocolate workers' union and a class of '71 home boy. "A lot of that's gotten lost."

By now, the state attorney general was looking into alumni charges of school mismanagement by the Hershey Trust board. When a representative of the AG's office met with the board last December and opined that the trust should diversify its holdings, he found a rapt audience. In March, a board delegation met with Lenny and told him to put the company on the block.

Lenny went through the roof. He told them he didn't want to sell Hershey and asked for time to put together a stock buyback offer. Then he resumed girding for his next test: a war with the chocolate workers' union. Hershey had made a contract offer that required workers to pay a larger portion of their health insurance premiums--12% rather than 6%. In protest, some 2,700 workers walked off their jobs in April.

In the midst of this unpleasantness, in May, Lenny presented his buyback offer to the trust. According to trust CEO Rob Vowler, it called for Hershey Foods to purchase half of the trust's shares at a 10% premium. The company would then help the trust sell the remainder of its shares in the open market over the next three to five years. "We had a lot of problems with that," says Vowler. "If we gave up half our shares, we'd give up control of the company, and we weren't convinced a 10% premium was enough. As painful as it is, we had to ask the company to put itself up for sale." With the dust barely settled from the end of the 44-day strike--the company agreed to keep health benefits unchanged in return for lower wage increases--Hershey Foods did just that on Black Thursday, July 25.

The citizens' militia promptly began to counter-attack. Not with any military precision, to be sure: There's no rich history of community organizing or street-fighting in the ultimate company town. Yet an eclectic variety of people and a manic energy made it effective. Mike Macchioni, a class of '74 home boy, was webmaster of friendsofhershey.org, which posted the latest news and hosted a lively chatroom. Jesse Engle, a former dot-commer who's returned post-bubble to Hershey, created a high-tech dump-the-trust petition, collecting a quick 6,500 signatures, mostly by e-mail. Bruce Hummel's chocolate workers' union paid for two buses to take Hershey people to a Harrisburg protest rally. (Though both of the serious Hershey bidders wound up pledging to keep jobs in the community, the townsfolk didn't buy it.)

Meanwhile, Dick Zimmerman, the former Hershey Foods CEO, testified to try to stop the sale at an injunction hearing forced by Attorney General Mike Fisher. (It was a good political move for Fisher, who is running for governor.) Zimmerman and former Herco CEO Bruce McKinney also worked their contacts with the state legislature, where a bill aimed at short-circuiting the sale was being considered, and made back-channel contacts to lobby wavering directors.

And, of course, they succeeded. But now that the immediate euphoria of the town's victory has worn off, some wonder whether that victory was a Pyrrhic one. For these self-appointed keepers of Milton Hershey's flame, there's no going back. The end of silent acquiescence is surely a good thing. But it's been replaced by endless chatroom conspiracy theories. One popular protest sign tells it all about the new age of suspicion: HERSHEY TRUST IS AN OXYMORON. "You know, we're really involved in a lose-lose situation," says Zimmerman. "The relationship among all the entities has been changed dramatically. There will always be antagonism."

The greatest animus lies between Hershey Foods and Hershey Trust. The fissures that contributed to the auction have only widened in the past few weeks. Richard Lenny reluctantly went through the exercise of putting the company on the block and letting his competitors parade through, getting a good look at his operations. "Rick was extremely upset that our business, employees, family members, and neighbors had been dragged through an extraordinarily difficult ordeal only to have the trust change course at the end of the 11th hour," says Hershey spokesman John Long. Lenny issued a peevish statement that the company would not again make a buyback offer to the trust.

So the town emerged with its beloved company--but it can't truly regain its past. The quilt that is Hershey has frayed, and many of its threads have popped. Hershey long proclaimed itself "the sweetest place on earth." Now, it's bittersweet.

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