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Quaker, Kellogg in talks?
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September 8, 2000: 5:18 p.m. ET
U.S. cereal makers see stocks soar as rumors of a possible union abound
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NEW YORK (CNNfn) - Shares of top U.S. cereal makers Quaker Oats Co. and Kellogg Co. both climbed more than 7 percent Friday amid speculation that the two companies could be in merger discussions.
Quaker Oats' (OAK: Research, Estimates) stock climbed $5.06 to close at $72.69, while Kellogg (K: Research, Estimates) jumped $1.75 to $24.75. Both companies remain well off their 52-week highs and are trying to reverse a summer-long cyclical rotation out of food stocks that has hurt the entire sector.
Quaker Oats and Kellogg both declined to comment on the speculation.
Several analysts interviewed Friday said the speculation was just that. The rumor seemed to spread like a wildfire early in the trading day, although no one was quite sure where it originated.
 Still, several said such a union would make sense. Both Kellogg and Quaker Oats have seen their stocks deflated by investors who saw few prospects for growth.
Analysts said Kellogg, the maker of Corn Flakes, Frosted Flakes and Eggo frozen waffles, is a particularly attractive target. Though it still ranks as the world's top cereal maker, stiff price wars have forced its once-dominant hold over the U.S. market to slip in recent years. The company also has been slow to transition to on-the-go products, like its Nutri-Grain cereal bars, increasingly preferred by the American consumer.
"Kellogg needs to do something and there are expectations that Kellogg is even looking at Keebler, which is for sale," said John O'Neil, an analyst with PaineWebber.
Still, O'Neil said a merger with Quaker Oats would make strategic sense for Kellogg. The Chicago-based maker of numerous hot cereals boasts high-growth products like Gatorade sports drinks and, in the eyes of analysts, has done a better job of managing its balance sheet in recent years.
 Such a union would also provide the companies with several attractive synergies. Combined, Quaker Oats and Kellogg could substantially reduce expenses, helping them better compete in the ongoing price wars, which have only grown more intense as cheaper store-brand products have started taking shelf space.
A merger would also allow Quaker to dramatically expand its global reach. Currently, a sizable majority of Quaker's sales come in the United States and Canada, while Kellogg has a substantial international reach.
Merger rumors are nothing new in the food industry. Since Unilever PLC agreed to acquire Bestfoods (BFO: Research, Estimates) for $24 billion in May, Nabisco Holdings Corp. (NA: Research, Estimates) joined forces with Philip Morris (MO: Research, Estimates) and Keebler Foods Co. was put on the selling block.
Analysts expect several more mergers involving companies like Campbell Soup Co. (CPB: Research, Estimates) and Heinz (HZ: Research, Estimates), both of which also saw strong gains Friday in the wake of Quaker Oats' and Kellogg's rise.
"Companies like Campbell, Quaker Oats and Heinz need to do something," said Romitha Mally, an analyst with Goldman, Sachs & Co. "Campbell and Heinz both came out with earnings this week and they were a bit depressing. So something will have to be done." 
-- Reuters contributed to this story.
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The Quaker Oats Co.
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