Bitter-sweet

NEVER underestimate the power of local politics in small-town America. Hershey Trust is the latest to capitulate before its might, announcing on September 17th the abandonment of its plans to sell its controlling stake in Hershey Foods, America's largest chocolate maker.

The charitable trust, set up in 1905 by Milton Hershey to fund a boarding school for the poor, has almost 60% of its $5.4 billion of assets tied up in Hershey Foods' shares. While the trustees had been diversifying, and anyway had more than enough money to meet the needs of the school for the foreseeable future, they still felt overly exposed to the fortunes of the chocolate maker. And when a rival food firm—said to be Kraft or Wrigley—inquired about buying the entire stake, they liked the prospect of a juicy premium for their control of the company and a more balanced portfolio.

The trust's sole beneficiary, the Milton Hershey School, is one of America's richest. But even the largest fortune can disappear, especially when undiversified. Minnesota-based Macalester College, once also one of America's wealthiest, learned the value of not putting all its golden eggs in one basket when shares in Reader's Digest, then 60% of its endowment, tanked in 1997. This year the college had to delay sprucing up its dorms and sports facilities.

But Hershey's trustees badly underestimated the local outcry when they announced in July their plan to sell. Protesters from the school, the company and former trust members joined residents of the Hershey company town in Pennsylvania—half of whom work for the company—outraged at the risk of lost jobs and of a foreign bidder stripping the town. Enter the state attorney-general, Mike Fisher, an ambitious Republican looking to boost flagging support ahead of the November gubernatorial election. He persuaded the lower courts to slap an injunction preventing the trust from entering into a contract with a bidder without court approval. Curiously, Mr Fisher criticised the trust last year for not diversifying. Insiders claim his chief deputy for charitable trusts, Mark Pacella, advised the trust board to sell Hershey Food's shares—something he denies.

Whatever the rights and wrongs, the trustees have not distinguished themselves. Peter Schoenfeld of PSAM, a hedge fund in New York, is “flabbergasted” that the trust was so overwhelmed by politics that it acted before an appeals-court ruling, due in days, that was expected to reverse the injunction. Perhaps the trust received advice that gave warning that legal obstacles could take years to overcome. Perhaps the likely buyers, a Nestlé/Cadbury consortium and the favoured Wrigley, demanded that all the legal issues surrounding a deal be resolved first.

The ultimate loser may be Hershey Foods. Although its new management is doing well, the firm is again protected from the risk of unwanted takeover, with all that can mean for dampening incentives and innovation. There may well be missed opportunities—a multinational owner like Nestlé could have taken Hershey's cheap chocolate into big new markets such as China. Hershey itself has never been able to persuade anyone but Americans to eat Hershey Kisses. So there may eventually be reason for the townsfolk of Hershey to regret this week's events. But for now their victory must taste exceedingly sweet.