The surprise announcement that Dave West would be quitting as Hershey chief executive hit the US chocolate giant's shares and brought uncertainty to a company that has enjoyed something of a revival in recent years. Dean Best discusses the reaction to the news and the outlook for the confectioner.

The Hershey juggernaut has had a smooth ride in recent years under the stewardship of Dave West.

Since West became Hershey president and CEO in 2007, in the wake of his predecessor Rick Lenny's departure (which was said to have been prompted by frustration over the US confectioner's ownership structure), the company has enjoyed faster sales growth and better margins.

Questions over Hershey's long-term growth remained (What were its international ambitions? Would the company make a serious acquisition?) and the control of the company by The Hershey Trust was seen by many to be an obstacle to any major expansion. 

But West's tenure in charge of Hershey was widely seen by Wall Street as a success. "West has been an outstanding CEO, who re-established Hershey to the top of its game in a relatively short period of time," said Barclays Capital senior analyst for packaged food Andrew Lazar.

It was not much of a surprise, then, to see Hershey's shares slide yesterday (18 May) in the wake of the announcement of West's decision to leave. The shares were down again today as the market continued to digest his departure.

Among some analysts, there was an air of caution. West's exit, while a surprise, and his track-record notwithstanding is unlikely to sour Hershey's near-term prospects, they argued.

"We believe this decision by West will illicit concerns from investors around the story in place at the company which we believe are unfounded," wrote Stifel Nicolaus analyst Christopher Growe. "Hershey continues to operate strongly in the confectionery category and in building its international presence."

The relaxed reaction among some analysts seemed to be caused by Hershey's announcement that COO J.P. Bilbrey would become interim president and CEO. Hershey said it would "work quickly to name a permanent chief executive" but it was perhaps telling that the company also stated that its board had "unanimously" appointed Bilbrey to the interim position. The feeling, at least in some parts of Wall Street, is that Bilbrey will be given the job full time.

"JP Bilbrey may well ultimately get the nod as permanent CEO of Hershey," said Lazar. "Bilbrey has been the co-architect of many of Hershey's successful strategies of the past several years and we believe can capably maintain Hershey's current momentum, which remains very good, in our view."

However, any abrupt departure raises questions about a company's prospects. In this case, with the nature of Hershey's ownership always a topic of debate - and with West moving to another US packaged food company in Del Monte Foods - there is much to ponder.

Did West, like his predecessor, grow tired of dealing with a board of directors seemingly controlled by The Hershey Trust (which, although it only has 32% of the confectioner's shares, holds 80% of the voting rights)?

Announcing his departure from Hershey, West said he was "thankful" for the opportunity to "serve with the great people of The Hershey Company" but said it was "time to take the next challenge" after ten years with the group.

The statement left analysts to ponder why West could have decided to leave Hershey for a smaller company that has not enjoyed the same growth levels as the confectioner.

Growe said West could have found leading Hershey a "frustrating job at times" given the "dominance" of The Hershey Trust over the company's board. "The Hershey board maintained unprecedented control of the company even around simple decisions around capital expenditure commitments, small acquisitions etc," Growe said.

However, the Stifel Nicolaus analyst also noted that West knew Jim Kilts, an executive at private-equity firm Centerview Partners, one of the buyers of Del Monte, from their days at Nabisco.

"Could this be as simple as West preferring a private company with some more significant upside in terms of return/compensation for running Del Monte? We believe so. Either way, we find it interesting, particularly given the disparate track record of Del Monte in actually growing its business."

Nonetheless, there remains the feeling that, perhaps, West could, like Lenny, have run up against some resistance from The Hershey Trust over the company's growth ambitions overseas.

According to Lazar, West's move underlines the Trust's public pronouncements that it wants to keep control of Hershey and that the Trust is "not interested in selling in any international expansion, which we believe could have been a greater opportunity for West".

However, reports in the US claim that it was the Trust and not West that wanted Hershey to merge with Cadbury before the UK confectioner was taken over by Kraft Foods. Bloomberg reported today that, in 2009, the Trust's then MD Robert Reese "badgered" West to combine with Cadbury. West, the report said, argued a deal might make Hershey less financially stable. West did try to negotiate with Cadbury but, according to people who took part in the merger discussions, he feared Reese was negotiating behind his back, Bloomberg said.

In any case, Kraft ended up buying Cadbury and Hershey's international expansion has since consisted of investing in distribution and marketing in selected markets like Mexico, China and India. Analysts have questioned what Hershey plans to do with the amount of cash on its balance sheet and, more specifically, its M&A ambitions.

Speaking to analysts at the CAGNY conference in February, West maintained Hershey was looking at "alternatives for bolt-ons" and had "talked a lot about Latin America and Asia".

"The changes in the landscape that occurred - first Mars-Wrigley and then Kraft-Cadbury - certainly changed the landscape and it wasn't until the early part of last year when the dust all settled that we started to take a look at the landscape again," West said at CAGNY.

So, for any new CEO, Bilbrey or otherwise, Hershey's international expansion will remain a key question. And the debate will persist over whether the Trust acts as an unnecessary brake on Hershey's ambitions.

One role the Trust does play is as a likely block to Hershey being acquired. West's departure has sparked rumours in the press that Hershey, often linked to Nestle, could be a likely target for the world's largest food maker and, even, Kraft.

Such a scenario appears, at first glance, remote. "The large ownership stake held by the trust, which values steady cash flows above all else, including the interests of minority shareholders, may limit the firm's potential to expand through acquisitions or internally," Morningstar analyst Erin Lash said yesterday. "The Trust's ownership also probably limits the chance that Hershey becomes a takeover target in my opinion."