Morgan Stanley to spin off — not sell — Discover

/ Source: The Associated Press

After a day of speculation that Morgan Stanley was planning to sell its Discover Card division, the company said late Monday its board instead had voted to spin off its credit card unit to existing shareholders.

But analysts said the move by embattled Morgan Stanley Chairman and Chief Executive Philip Purcell and his fellow board members could still be trumped if a bidding war for Discover emerges, and some said the entire company could be on the block.

Shares of the Wall Street brokerage house, which gained more than 2.5 percent on media reports of the potential Discover sale during regular trading, rose another 1.5 percent to $59.15 in after-hours trading following the formal announcement.

Separately on Monday, dissident shareholders and former executives of Morgan Stanley stepped up a letter-writing campaign and called for the removal of Purcell in a full-page newspaper ad. Purcell and the board both sent memos to employees, reassuring them on the company’s direction.

Purcell insisted In a release accompanying the announcement that it was “the right time” for the spinoff, which would leave Discover as a stand-alone business. He did not provide details of how many shares of Discover stock would be distributed to shareholders for each existing Morgan Stanley share.

“The rationale for this action is twofold,” Purcell said. “One, to maximize the shareholder value in the Discover Card division, and allow management of that business to capitalize on the momentum, both in performance, and in the opportunities opening up in the payments market, and two, to further intensify our focus on the high return growth opportunities within our integrated securities businesses.”

In a conference call with analysts Monday evening, Purcell and other executives said they “felt great” about the spin off, which was expected to take place within three to six months. Purcell underscored that the firm was pursuing a spin off rather than a sale, in part to limit the related tax bill.

Earlier Monday, Dow Jones Newswires, citing an unidentified source close to the board, said the board of directors authorized the divestiture, which the news service said was expected to net between $8 billion and $9 billion.

Richard Bove, a securities industry analyst with Punk, Ziegel & Co., said with last week’s management changes and now the decoupling of the Discover unit, the board may yet be forced to consider selling the entire company as criticism mounts and dissidents are emboldened. Bove noted that the dissident group had already called for the sale of the Discover unit.

“The fact that they’re willing to do this indicates that the pressure being placed on the company is intense enough to get the board to crack a bit,” Bove said. “What I’m really interested in seeing is whether the board has cracked to such an extent that the tent door is open and anybody could come in and take a look at the whole company.”

The Discover Card business came to Morgan Stanley through its merger with Dean Witter Discover & Co. in 1997. Last Wednesday, Morgan Stanley reported that the Discover Card division had pretax earnings in the latest quarter of $380 million, a quarterly record. Morgan Stanley also acquired the PULSE EFT Association network, which manages merchant transactions, on Nov. 15 to complement the card business. Additionally, Discover recently announced a partnership with GE Consumer Credit to issue a Wal-Mart card and a Sam’s Club card on the Discover network.

The decision to pursue a Discover Card spin off reinforces the company’s strategy to be an integrated securities firm, Purcell said during the conference call.

The credit card business had been seen by analysts as a poor fit with Morgan Stanley, which does not have a consumer banking division. Dean Witter had tried to parlay the Discover Card business into an entire discount brokerage arm, but that ultimately folded after it was acquired by Morgan Stanley.

The Independent newspaper in London reported Sunday that HSBC Holdings PLC might seek to buy all of Morgan Stanley for 40 billion British pounds ($74.9 billion), though analysts said such a purchase would be too big for HSBC to manage. Bank of America has also been mentioned as a possible bidder for the Discover unit.

Meanwhile, the war of words between the self-styled “Group of Eight” shareholders and former executives, led by former Chairman S. Parker Gilbert and former President Robert G. Scott, and the company’s leadership continued Monday.

The dissidents, in a full-page ad in The Wall Street Journal, addressed Morgan Stanley employees, asking them to “not lose hope” as the group works to change the company’s leadership. “The leadership problems at the firm must be addressed and resolved,” the ad said. The group said it would also encourage Morgan Stanley’s board to create a system in which employees could complain anonymously about the company’s management, and pointed to a new Web site for those who wished to send their complaints to the dissidents.

In a memo to employees written Saturday and obtained by The Associated Press, Purcell addressed recent management changes that had resulted in the unexpected departure of at least three key executives in the company’s investment management division.

“Despite all the sturm und drang of the last week ... the board cares about this firm,” he wrote. “Your senior management cares about this firm.”

Purcell blamed media coverage for blowing the management shakeup out of proportion and said the replacement of President Stephan Newhouse with new co-presidents Zoe Cruz and Stephen Crawford was necessary for the health of the company. Underscoring his commitment to Cruz and Crawford, the company announced Monday that the two had been elected to Morgan Stanley’s board, bringing the number of directors to 13.

The board, in an employee memo issued Monday, defended the company’s profit growth and stock price, which was attacked by the dissident group as lagging behind competitors, and voiced confidence in Purcell.

“The board ... is fully behind Phil Purcell and your management team,” the board memo said. “There is no fair or compelling case for a change in the CEO, an action that would involve risk and discontinuity.”

A spokesman for the dissident group did not return a call seeking comment.