NEW YORK — If the endlessly speculated and long-awaited merger of Federated and May doesn’t happen, share valuations of the retailers could be affected.

May Department Stores’ stock price rallied nicely over the past month, based predominantly on rumors the company will be acquired by rival Federated Department Stores. But should talks between the two retailers fail, don’t expect May’s stock price to remain at such lofty levels (on a historical basis), some experts say.

That’s unless May cans the idea of a merger, and hires a new chief executive with specific turnaround experience — a move May investors would likely applaud.

If a May-Federated merger does not materialize, said Paul Nolte, director of investments at Hinsdale Associates, May’s stock price could give back the over 20 percent gain it has seen in the past two weeks. This is because the stock “really has been an underperformer…it’s been kind of sideways to down,” he said.

For much of the last two years, May shares have hovered at roughly $20 to $29. Since Jan. 12, however, when heavy speculation about a union between the two companies emerged, the stock added 21.6 percent, moving as high as $36.45 in intraday trading, and sometimes on unusually high volume. The stock ended Wednesday down 0.6 percent to $33.47.

On the other hand, Federated shares, which have traded between $55 and $58 in the last two weeks, could rise on investors’ relief that it would be “business as usual,” predicted Nolte, should merger talks stall. Then, the pressure would be off Federated to make the deal work.

“That [pressure] may be what is keeping the stock under wraps at this point,” Nolte added.

Currently, Federated’s stock is trading where it was before the potential merger was announced. “A lot of people took a look at the announcement and said ‘uh-oh,’” said a buy-side analyst who preferred not to be named. The initial reaction caused a slight dip in share price.

By late January, however, investors realized, “there’s a lot of synergies there and said ‘this would not be such a bad thing,’” the analyst said. Consequently,  the share price ticked back up.

This story first appeared in the February 3, 2005 issue of WWD. Subscribe Today.

Meanwhile, shares of Federated have outperformed May shares in the last two years, having risen about 120 percent. They closed Wednesday’s session up 0.2 percent to $57.80.

According to some analysts, though, prior merger talks centered on May’s share price as being undervalued, compared with the retailer’s real estate value. So if a deal with Federated fails, investors may not punish the shares.

“With [chief executive officer Gene Kahn] departing, there would be a chance for the shares to realize more value,” said the buy-side analyst. “You’d have to find a new ceo to fix the company, and that is not an easy task, necessarily.”

Two former executives from J.C. Penney & Co., retired ceo Allen Questrom and former chairman and ceo of Penney’s stores Vanessa Castagna, have been mentioned as candidates to take the helm at May.

Kim Picciola, an analyst at Morningstar, said finding a new ceo instead of a merger is a possibility. But she said the person would have to bring a fresh perspective and offer a specific direction in order for May’s shares to hold its gains.

“The shares were reflecting May’s underperformance [prior to the recent merger talks] and if the company is going to continue to underperform, then the stock will reflect that,” Picciola said.

In another scenario, the merger talks could take too long for investors who recently scooped up May shares assuming a potential buyout from Federated was imminent.

May’s board has a big decision to make, the analyst continued. “The thing is it’s now clear this is an opportune time for a merger. You’re trying to get value for your shareholders, but you’ve kind of put a gun to your head because you’ve already gotten rid of the ceo.”