In one three-week period last summer, $56.2 billion worth of deals were announced, including two megamergers: Bestfoods, the world's 21st largest food company, ended its flirtation with Unilever NV (No. 5) when the Anglo-Dutch conglomerate sweetened its offer to $24.3 billion, and cracker king Nabisco (No. 22) was bought for a budget-busting $29 billion by No. 2 Philip Morris Co., a 3.5 multiple to sales. (See complete list of this year's top 100 on page 72.) Philip Morris will combine Nabisco with its Kraft Foods operations, creating a food conglomerate that challenges Nestle for the title of world's largest food and beverage company.

When they weren't setting a hook for each other, industry leaders were casting for smaller fish, particularly firms in the good-for-you food category (see related story, page 66). The merging and maneuvering received the tacit approval of an investment community spoiled by growth rates in new-economy companies. Not satisfied with food and beverage's single-digit growth rates, investors yearn for more spectacular spikes, and if that means augmenting organic growth with acquisitions, so be it.

The 100 food conglomerates included in this year's Top 100 had combined sales of $651.7 billion in their most-recent fiscal years, a 3 percent improvement over the previous year. The 38 U.S.-based operators listed accounted for $309.34 billion of that total, up 4.1 percent, while the 62 non-U.S. entities experienced 2 percent growth to $342.33 billion.

Steady and stodgy growth leaves the investment community cold, and the stocks of publicly traded food companies remain out of favor. "Food companies are growing at 2 to 3 percent, and the stock market demands 20 to 30 percent growth," notes analyst Adam H. Ismail of Health Business Partners, a Providence, R.I. investment bank. By acquiring entrepreneurial firms that have carved a niche in the natural foods business, major food companies hope to leverage their distribution strength to achieve double-digit growth.

One example is Kashi, the natural cereal maker that pushed its way into the ranks of the top 25 cereal sellers with distribution largely limited to health-food stores and Whole Foods-type grocers. Now part of No. 25 Kellogg, Kashi should experience significantly greater growth by saturating mass merchandisers, Ismail predicts. One potential blockbuster: GoLean, a line of high protein, high fiber cereals, drink mixes and snack bars being promoted as weight-loss aids.

Similar growth strategies are being deployed for energy bars and other categories. The next hot food could be colostrum, Ismail suggests. This antibody-rich ingredient is derived from cows within 36 hours of birthing, then subjected to minimal, nonthermal processing. Firms such as GalaGen Inc. have invested a combined $75 million to develop colostrum as an immune-enhancing food additive, Ismail says, and dairy giants can be expected to court them if a market emerges.

While the sector for natural foods and beverages is heating up, functional foods are on the wane, which is depressing acquisition activity. Generally, M&A activity in the food industry is down, despite the high-profile deals. The actual number of mergers and acquisitions involving food processors slipped almost 30 percent in the first half of this year, reports the Food Institute in Fair Lawn, N.J. The institute tracked 91 U.S. food and beverage deals through June, down from 1999's 129. For all of last year, ownership of 229 food companies changed hands, off from 230 in 1998, according to Brian Todd, senior vice president.

But the cash value of those sales is setting new standards, thanks in part to purchasers' willingness to pay premiums unseen in recent years. Unilever's winning bid for Bestfood represented a 32 percent premium over its initial offer.

Food and beverage occupies a global stage, and there were a number of other noteworthy deals. Brussels-based Interbrew (No. 56) purchased No. 61 Bass plc for $3.45 billion. No. 8 Diageo sold its $6 billion Pillsbury division to No. 26 General Mills, and Danone (No. 16) received $2.7 billion from the sale of Kronenbourg to Scottish & Newcastle (No. 74). Pending is the expected sale of Elmhurst, Ill.-based Keebler Foods for up to $5 billion, suggesting 2000 may be remembered as food's megadeal year.

Eyes on the prize

Campbell Soup Co. (No. 29) and H.J. Heinz Co. (No. 19), two venerable players whose products are associated with the center of the retail store, are shrugging off investor dissatisfaction and forging ahead with capital projects designed to make them more competitive. Campbell, for example, is rolling out its seven best-selling condensed soups in a new ready-to-serve format featuring easy-open tops. Combined with stepped-up marketing and advertising, the new packaging could kick-start growth in the wet soup market, a category Campbell dominates with 70 percent share but which shrank 3 percent last year domestically, 2 percent worldwide.

The company also is pushing ahead with processing improvements, notably aseptic particulate processing under the Liebig brand name in France. Campbell continues to invest in the fast-growing away-from-home category, with a new plant for Stockpot refrigerated soups coming on line to support foodservice initiatives.

Heinz is forging ahead with Operation Excel, a $1.1 billion restructuring plan that included the closing of 11 factories last year and a refocusing on six core food categories, including infant foods. As part of that initiative, Heinz has offered $185 million for the Milnot Holding Corp., the chief asset of which is Beech-Nut baby food. An acquisition would double Heinz's share of the $800 million U.S. category to 28 percent, well behind segment leader Gerber, a unit of Swiss-based Novartis AG (No. 87 in the Top 100). The U.S. Securities and Exchange Commission has challenged the deal.

In the meantime, Heinz is pressing ahead with packaging innovations that earned the firm Packaging Leader of the Year honors from the Packaging Education Forum. Recent breakthroughs include the EZ Squirt ketchup bottle, featuring an adjustable nozzle and available in traditional red and "Blastin' Green" colors. The ketchup is fortified with vitamin C and should continue sales gains that have upped Heinz's share to 54 percent in the U.S. and 75 percent in the Canadian ketchup markets. The company also rejuvenated the Ore-Ida retail franchise with the category's first stand-up resealable package.

Another noteworthy corporate project is No. 3 ConAgra Foods' Operation Overdrive, a restructuring program that already represents a $1.1 billion investment in the last two years. The program is driving down costs and enhancing customer channelization of resources, particularly in the fast-growth packaged and refrigerated food segments.

ConAgra beefed up an already-formidable lineup of brands with August's acquisition of International Home Foods, which owns the Hunt's, Orville Redenbacher, Peter Pan and Swiss Miss brands, among others. ConAgra valued the deal at $2.9 billion.

In other industry segments:

• Beverage companies, already reeling from an off year in 1999, received a January jolt when No. 6 Coca-Cola Co. announced it would slash 6,000 jobs worldwide, including 3,300 in the United States. Most of the reduction in force is occurring at the corporation's Atlanta headquarters, as Coke shifts more resources and responsibilities to local business units.
  Of the 18 beverage companies in the Top 100, 11 reported reduced sales in the most recent fiscal year.
• A new intermediate shelf-life process that doubles product codes for Milk Chugs and other dairy items and a newly formed national refrigerated products division are center pieces in No. 53 Dean Foods' growth plans, while Suiza Foods (No. 54) looked to its Morningstar Foods subsidiary for innovations such as a Hershey Milk cobranding deal and Second Nature, a fat- and cholesterol-free egg alternative.
  While those dairies are relaxing their torrid acquisition pace -- Dean bought 26 firms in the last five years, and Suiza added 17 last year alone -- merger activity is heating up in Europe. The biggest deal occurred in the spring, when No. 76 MD Foods of Denmark merged with Arla of Sweden to create a $4.3 billion dairy operation. But Europe remains a three-horse race: dairy sales for Nestle, Unilever and Danone exceed $6 billion each.
• Smithfield Foods Inc. (No. 39) is one of the few meat and poultry processors to hold any favor with the investment community, although the category is enjoying generally strong sales growth: six of the 11 meat pure-plays in the Top 100 reported double-digit growth in the most recent fiscal year.
• Smithfield raised eyebrows in August when it acquired a 6.3 percent stake in rival IBP Inc. (No. 11), which promptly trumped Smithfield by taking itself private. Smithfield has pursued a vertical integration strategy in recent years, handling the raising, slaughtering, processing and marketing of pork.
  Wall Street has no influence on one of the fastest growing meat processors. Keystone Foods LLC (No. 79), a privately held firm that directs 37 plants in Europe, Asia, South America and elsewhere from its Bala Cynwyd, Pa., headquarters, is continuing its remarkable sales growth, supplying McDonald's and other foodservice accounts with hamburger patties, chicken nuggets and fish and pork products. The company processed 1.4 billion pounds of meat last year, according to Herbert Lottman, chairman and CEO.
  Citing food safety as the key issue confronting the food industry, Lottman says dissatisfaction with commercial pathogen-testing systems prompted him to invest in Molecular Circuitry Inc., a firm that has developed an electro-immunoassay biosensor that significantly reduces false positives and testing time for E. coli, Salmonella, Campylobacter and other pathogens.
  "Because we're a processor, we understand what is needed for pathogen testing in food plants," maintains Lottman. The new system, which will be marketed under the name Detex, already is in place in Keystone's plants. The proprietary media used cuts the enrichment time needed to obtain results from 24 to 8 hours, he says.
• Grain-based foods provided a stark lesson on the challenges of effectively implementing a production upgrade program. Flowers Industries (No. 50), an investor favorite a year ago, suffered through production delays and lost sales in late 1999-early 2000 because of delays in equipment installation, programming of control software and new-employee training in its Mrs. Smith's Bakeries division. The situation played a major role in Flowers' decision to entertain takeover offers for Keebler, which is 55 percent owned by Flowers.
  Flowers has lavished $174 million in the last two years to expand automation and increase efficiency at seven of the 10 Mrs. Smith's plants. The Stilwell, Okla., unit received $60 million of that, with computer-controlled bar-coding and inventorying systems, a 6 million cubic foot freezer and five 78-ft.-tall laser-guided cranes among the improvements. Unexpected delays in completing the work resulted in product shortages in the fourth quarter, when half of all retail pie sales occur.
  Keebler suitors have included Danone and Campbell, both of which dropped out, and Kellogg, which has a long relationship with Keebler. Keebler's R&D staff includes food scientists dedicated to Kellogg product development. They developed Pop-Tarts in the 1960s on Kellogg's behalf, and Keebler still produces the product at its Grand Rapids, Mich., plant.
  Another baking conglomerate undergoing dissection is Specialty Foods Corp., a holding company formed in 1993 by Texas billionaire Robert M. Bass. Specialty Foods sold off Chicago-based Metz Baking in March to the Earthgrains Co. (No. 98), and it is closing a $250 million sale of Mothers Cake and Cookie Co., the nation's third largest cookie company, to Italy's Parmalat Finanziaria SA (No. 35).

Critical mass for e-commerce

Parmalat's $6.25 million stake in Transora wasn't enough to secure a seat on the board -- other consumer product companies ponied up another $240 million -- but it does strengthen relationships with 34 other food companies, including 22 from the Top 100 list. Collectively, Transora investors spend $350 billion annually in operating expenses, giving the Internet startup an edge in reshaping procurement practices. "The sheer number of companies coming together is unmatched in the B2B marketplace," claims Judy Sprieser, a Sara Lee Corp. (No. 15) executive who chaired the exploratory committee that led to the Transora initiative.

Major corporations also make inviting legal targets, and the food industry has experienced its share of major judgments and settlements this year. One of the biggest came in August, when Interstate Bakeries Corp. (No. 62) was ordered to pay $120 million in punitive damages on top of $11 million in actual damages to 21 black workers who alleged racial discrimination at IBC's Wonder Bread plant in San Francisco. IBC is appealing.

In May, Sara Lee settled a class action suit relating to 1998's listeriosis outbreak linked to it Ball Park Franks. Sara Lee, which will pay up to $50,0000 to claimants whose illnesses lasted more than four days, estimated the settlement's cost at less than $5 million. The plaintiff's attorney, on the other hand, suggests that will only be a fraction of the cost and does not include several wrongful death cases still pending.

These diversions aside, the world's leading food companies will continue to focus on the product development and process improvements that pushed them into the elite ranks in the first place. Acquisitions are a part of business life, but organic growth always has had the most staying power in the food industry.

Sidebar: The price tag for healthy eating

In January, the Kraft Foods division of Philip Morris buys Chicago-based Boca Foods and shells out $268.4 million for Balance Bar Co., the Carpinteria, Calif., energy bar maker that went from $1.3 million sales in 1995 to $100.9 million last year.

In February, Nestle USA acquires PowerBar Inc., the leader in the energy-bar category. Unilever instantly captures 45 percent of America's nutritional supplement market with April's $2.3 billion acquisition of SlimFast Foods Co.

Following up its November purchase of soy-substitute manufacturer Worthington Foods for $307 million, Kellogg purchases La Jolla, Calif.-based Kashi Co., a maker of natural cereals, in August for an estimated $60 million.

Sidebar: Top British beverage firm sheds food portfolio

The uneasy amalgam of 1997's merger of Guinness and Grand Met, Diageo is taking a giant step toward fortifying its position as the world's premier alcoholic beverage marketer with the sale of Pillsbury to General Mills and the partial sell-off of its Burger King division. Much of the $6 billion-plus in proceeds is expected to buttress Diageo's bid for the spirits business of Seagram.

Noting the bullish U.S. market for food company sales, London stock analysts gave a spirited thumbs-up to the Pillsbury sale. Though it cut its losses significantly in the most-recent fiscal year, Pillsbury suffered net losses of $371 million the last two years, according to Diageo. Beer and spirits profits, on the other hand, are up 15 percent, with leading brands such as Johnnie Walker, Smirnoff and Jose Cuervo driving much of beverages' growth.

Diageo commands 23 percent of the global spirits market, so it's no surprise that Guinness marketer Paul Walsh recently was elevated to group chief executive in a management shakeup that also saw James Blyth replace former chairman Anthony Greener. Walsh's first priority will be securing the rights to some or all ofhe Seagram brands, which include Captain Morgan rum and Absolut vodka. An acquisition could boost Diageo's global share to more than a third of the market, three times that of closest rival Allied Domecq plc.