TAKEOVER TALKS HAUNT QUAKER COMPANY IS A RIPE TARGET, WHILE NO-COMMENT POLICY FEEDS RUMORS

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Week after week, month after month, year after year, Ron Bottrell answers the same question the same way.

"As a policy, we do not comment on rumors or unusual activity in our stock," the chief spokesman of Quaker Oats Co. tells all who ask about recurring reports that the Chicago food company is about to be bought.

Since June, Mr. Bottrell and his colleagues have issued that statement dozens of times as Quaker's stock advanced twice on two separate takeover rumors.

Nonetheless, the decade-plus of rumors has generated close to 500 stories in major U.S. newspapers, played havoc with Quaker's stock and distracted management from the job of running the company.

And yet those who follow Quaker have yet to uncover any evidence that it has even been formally approached about a takeover.

So, why can't the Quaker Man shake the speculation?

No. 1: The company has landed on Wall Street's short but stubborn list of favorite takeover candidates.

No. 2: There could be some truth to the rumors.

Arbitrageurs, and the financial journalists who follow their industry, deserve part of the blame for persistent takeover talk, said Sharon Kalin, president of Athene-Coronado Management, a New York arbitrage company.

"Once a story becomes a story, someone resurrects it every few months," she said.

Food marketer Campbell Soup Co. has long suffered from stories that the founding Dorrance family wants out of the company. H.J. Heinz Co. is another perennial in rumor mills. And yet the ownership of both companies remains unchanged.

"There are some companies like that-it's the same rumor every time," said Paul D. Sonz, managing partner of an arbitrage company in Mill Valley, Calif., that bears his name.

Companies that categorically deny rumors put the stories on the back burner, at least for a few months, Ms. Kalin said. Given the prevalence of shareholder lawsuits alleging financial fraud, fewer public companies can discredit deals that are imminent.

But companies that respond with a "no comment" leave room for the stories to grow, Ms. Kalin said.

That could be part of the problem for Quaker.

It issued its standard no-response response twice in recent weeks, first in June to a rumor that food giant Nestle was a possible suitor and then in July to a similar rumor about food and tobacco company Philip Morris Cos. (Nestle's chairman denied interest; Philip Morris would not comment.)

The first rumor sent Quaker's stock price up more than $7 to a new 52-week high of $78.50 before it plunged $8.25 on Nestle's denial. The second sent the stock up a more modest $2.75.

Despite the turmoil caused by such swings, Quaker is sticking to policy.

Chairman-CEO William D. Smithburg was unavailable for comment. Anyway, his spokesman notes, "I doubt that he would do an interview on this particular topic."

Denials and silence from Quaker and its purported suitors aren't enough to stem takeover talk, though. Some aspects of Quaker's business-and the way it is managed-make the company vulnerable, eventually, to a takeover.

Among the reasons the story remains alive:

The food industry has been consolidating, with big companies buying smaller ones.

Quaker, with sales of about $5.9 billion and a market value of around $5 billion, is small enough to be picked off by a larger consumer products company, most analysts maintain.

Quaker's Gatorade, with sales of about $1.1 billion and dominance in the sports drink market, is a strong magnet. A foreign buyer, especially, could speed up Quaker's efforts to push the brand into more international markets.

Many of Quaker's other product lines-rice cakes, cereals, frozen waffles and pet food, among them-don't have the appeal of the company's biggest money maker. A buyer interested primarily in Gatorade could sell smaller brands to pay acquisition debts.

International companies, some with excess cash and some benefiting from favorable currency fluctuations, are shopping the U.S. marketplace.

Gerber Products Co. agreed in May to be bought by drug marketer Sandoz, of Basel, Switzerland; Roche Holding also based in Basel, recently bought Palo Alto, Calif., drug maker Syntex Corp., and Swiss-based Nestle took a stake in Dreyer's Grand Ice Cream Co. of Oakland, Calif.

Finally, Quaker has hardly been an outsider in the merger and acquisition game, buying such brands in recent years as Chico-San rice cakes and Near East rice products, and selling its Fisher-Price children's products business and Ghirardelli chocolate line. Even Gatorade was a purchase: Quaker bought the brand in 1983.

Given the dynamics of many of its brand categories-mature, slow-growing markets with fierce competition and resistance to price increases-Quaker has turned much of its attention to cost controls in recent years.

It has launched four such programs in the past three years, with the most recent one, announced in May, already targeting the elimination of about 1,000 of some 20,000 Quaker jobs worldwide.

Ms. Gallagher is an associate editor with Crain's Chicago Business.

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