Federated Department Stores ( FD) reportedly is discussing the acquisition of its chief rival, May Department Stores ( MAY), in a deal that would create a combined company with $30 billion in sales. Federated, which operates Bloomingdale's and Macy's chains, is in preliminary discussions with May, which operates Filene's, Famous-Barr, Marshall Field's and Lord & Taylor, according to a report in the Wall Street Journal. Sources familiar with the situation said negotiations are at a "delicate stage after several meetings, and there is no guarantee a deal will be reached," the report said. Federated is the larger of the two department-store operators, with a market value of $9.7 billion, while May is valued at $9.2 billion. In 2002, the companies discussed a potential merger, but a deal could not be reached. Richard Hastings, retail economist with Variant Research, said the deal would probably take the form of a stock swap. "If the deal occurs as currently rumored, there are significant integration issues that require a lot of intelligent planning," Hastings said (he does not own shares of either company and his firm does not have a banking relationship with them). "May is not an integrated, coherent entity. The divisions have many operational idiosyncrasies. Their information systems are not synchronized in an optimal way between the various divisions of the company. "This would put some pressure on Federated to execute an effective integration," he added. "Analysts would become concerned about Federated." News of the discussions comes on the heels of a blockbuster shakeup in retail, when Kmart ( KMRT) moved to acquire Sears ( S) in a deal masterminded by hedge fund guru Ed Lampert of ESL Investments. The new company, Sears Holdings, will take on Wal-Mart ( WMT) and Target ( TGT) as the No. 3 player in the world of discount superstore chains, whose rise to prominence has wreaked havoc on traditional retailers from department stores to grocery stores. A merger of Federated and May would confirm speculation that more consolidation in retail is likely. In addition to the rise of discounters, department stores have come under new competitive pressure from specialist retailers in the apparel and home furnishings space. A combined company would have the potential for a better competitive footing by using its size to cut costs from suppliers. Last Friday May's chairman and chief executive, Gene Kahn, resigned suddenly with no explanation and the company named president John Dunham to serve as acting chairman and chief executive. That development could clear the way for Federated Chairman and chief executive Terry Lundgren to lead a combined company. Lundgren addressed the National Retail Federation's annual "Big Show" convention in New York City yesterday, making no mention of the negotiations.