A merger of two of the nation's biggest department-store operators, Federated Department Stores and May Department Stores, could create...

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PHILADELPHIA — A merger of two of the nation’s biggest department-store operators, Federated Department Stores and May Department Stores, could create a more efficient operation better able to compete with discounters, an analyst said yesterday.

“This is a merger that makes sense,” said Jeff Stinson of FTN Midwest Securities in Cleveland.

But another retail expert, Wharton School marketing professor Steve Hoch, countered that department-store chains need to become smaller, not bigger, to survive against discount giants Wal-Mart and Target and niche retailers such as Gap.

“I’d be surprised if it happens,” Hoch said.

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May and Federated both declined to comment yesterday on a Wall Street Journal report that Federated, the parent of Bon-Macy’s (changing its name to Macy’s) and Bloomingdale’s, was in merger talks with May, which owns Strawbridge’s, Lord & Taylor, Marshall Field’s, Hecht’s and Filene’s, among others.

If they were to marry, the combined company would create the nation’s No. 2 department-store chain behind J.C. Penney. The combination would have nearly 1,000 stores, 245,000 employees and revenue of $28.6 billion.

The report comes on the heels of Kmart’s November deal to buy Sears for $11 billion.

The Journal said Gene Kahn’s resignation last week as May’s chairman could pave the way for a merger.

Changes could range from infusing the company with young, talented merchandisers, who would help make its store labels more fashion-forward, and reducing its store count.

Kahn, who had been with May in various capacities since 1990, left the company seven months after helping May acquire Target’s more than five dozen Marshall Field’s department stores and nine Mervyn sites for $3.24 billion — a price many analysts called too high. Kahn also had been criticized by people within the company for micromanaging the business and not developing a clear vision for the company, analysts said.

Discussions between Federated and May have been on and off for a couple of years, but Kahn’s abrupt resignation could clear the way for an acquisition. Federated’s spokeswoman Carol Sanger and May spokeswoman Sharon Bateman both declined to comment Thursday.

Previous discussions had been stalled over management concerns, and with no succession plan in place at May, Federated’s chairman and CEO Terry Lundgren could head the combined entity without butting heads with Kahn.

Stinson, of FTN Midwest Research, said the deal could produce cost savings for the combined company.

“There are merchandising synergies,” Stinson said. “Federated is known for having strong private labels, such as I.N.C., Alfani and Charter Club. May is not.”

Stinson also said the retailers could save on advertising, back-office technology and administrative costs.

The merger would need to pass antitrust regulatory hurdles as well, but Stinson did not think that would be a problem.

“Department stores are losing market share to discounters, warehouse clubs and specialty retailers,” he said.

Consumers could benefit from a merger, he said. “For consumers, there will be very few situations where there will be a direct overlap in stores,” he said. “There’s not going to be a loss of an option.”

Wharton’s Hoch, however, was skeptical of the proposition.

Federated and May, he noted, “have too much space. It’s hard to imagine they need to be any greater in size for buying clout, etc. There’s only 1,100 big malls in the country, and they’re sitting in the same mall in different places. There may be some regional pockets where one of the firms doesn’t have a presence, but frankly, not many.”

Hoch said if the two companies merged, they likely would not be able to reduce costs by closing stores.

“It’s not like you can close down 20 percent of the stores,” he said. “They have big financial obligations in terms of leases.”

May shares closed up $2.88, or about 9 percent, at $34.25 yesterday. Shares of Federated fell $1.77, or 3 percent, to $55.31.

Background on Gene Kahn and May’s purchase of Marshall Field’s provided by The Associated Press.