Consolidation is apparently the watch word in retailing these days.

It was only last week that Kmart and Sears completed their merger to become Sears Holding (NASDAQ:SHLD), and Federated (NYSE:FD) is in the midst of taking over Mays' (NYSE:MAY) properties. Yesterday, both J.C. Penney (NYSE:JCP) and Saks (NYSE:SKS) gave their investors a bit of a boost when each was reported to be the target of possible takeovers.

The idea of a Penney's takeover is a bit surprising. After all, the company's at the tail end of a five-year turnaround plan that seems to have led the 100-year old retailer to right its ship. Same-store sales have been up nicely for the past six months -- February's comps were up more than 6.5% -- profits have returned, and the company has been improving its products with updated lines and fashions. The company wouldn't comment on the rumors, saying it had its own long-range plan to return value to investors, which suggests it wasn't cottoning to the idea of a takeover.

Still the rumor holds a certain cachet, if not intrigue. Cerberus Capital Management, one of the two private investment firms said to be teaming up for the takeover, has participated in a variety of retail acquisitions, including the $1.7 billion purchase of Mervyn's from Target (NYSE:TGT) last year, along with an unsuccessful attempt to acquire Toys "R" Us (NYSE:TOY) this past February. Moreover, an executive at Cerberus was the former chairwoman and CEO of J.C. Penney's catalog and Internet division before being passed over to run the company when Allan Questrom resigned and was replaced by current CEO Myron Ullman. What's that they say about a woman scorned?

Saks would appear to be a more appropriate takeover target. Comps have been lackluster, earnings fell 24% from last year, and the hoped-for cost savings from the 1998 merger of Saks Fifth Avenue and Proffitt's never materialized. Saks was said to have hired both Goldman Sachs and Citigroup to explore "strategic alternatives." The company operates two divisions, its luxury Saks Fifth Avenue stores, and a regional mid-priced department store group consisting of Proffitt's, Carsons, Younkers, McRaes, and Parisian.

North Carolina-based Belk's, a regional retailer, has been rumored to be interested in acquiring some of Saks' properties. Interestingly, Sears Holding might be in the running, too -- an irony that would not be lost on the former shareholders of Kmart. Tony retailer Neiman Marcus is also putting out feelers for a possible sale with a price tag estimated to be around $55 billion.

With all the consolidation underway in retail, it's enough to make you wonder what's driving it. Primarily the mid-market retailer has been under assault from above by top-end merchants selling their luxury goods, as well as from below from discounters like Target and Wal-Mart. In the middle of the squeeze are the everyday department stores names that populate every mall across the country.

The squeeze factor may well explain why Penney's might be reluctant to leave the middle ground: As the competition shrinks, it stands a good chance of picking up market share.

Whether consolidating or going it alone, retailing is worth watching these days.

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Fool contributor Rich Duprey owns shares of Wal-Mart, but he does not own any of the other stocks mentioned in the article. The Fool has a disclosure policy.

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