Morgan Stanley Chief Executive John Mack made his first major move to revamp the Wall Street firm by announcing that the company will not spin off its Discover Financial Services credit card arm, as was considered under former CEO Phil Purcell.
Critics have claimed the credit card division has been only modestly profitable and unrelated to the company’s high-end financial services. Discover has generated strong cash flow and consistent earnings for the company, however, giving Morgan Stanley liquidity for its other investment banking, asset management and brokerage divisions.
The company’s board of directors instead chose Wednesday to sell Morgan Stanley’s aircraft-leasing division, AWAS, considered a non-core asset as Mack focuses on more traditional investment and credit divisions. The company will take a $1 billion charge in the third quarter to write down the value of AWAS to what it believes will be a compelling sales price — around $2.5 billion to $3.3 billion.
“Discover is a unique and successful franchise,” Mack said. “It is a reliable stream of high quality earnings and a broad capital base, and it generates a large amount of free cash flow. Discover is a viable asset for the firm, and has the potential to grow and create value for our shareholders.”
Under Purcell’s leadership, Morgan Stanley said in early April that it was considering a spin-off of Discover. The move received a mixed greeting from analysts and observers. Some felt it was Purcell’s way of assuaging his critics that he was ignoring Morgan Stanley’s traditional banking business in favor of the Discover and retail brokerage arms that he headed at Dean Witter prior to its 1997 purchase of Morgan Stanley.
Discover executives, however, expressed optimism at the time of the announcement.
Division President Roger Hochschild told The Associated Press at the time that the Discover unit had never achieved a great deal of synergy with the rest of Morgan Stanley. Discover caters to middle-market credit card users, while Morgan Stanley’s asset management and brokerage arms aim for more well-to-do clients. However, the company had always maintained that cross-marketing between Discover and the other parts of Morgan Stanley would be successful.
Shedding AWAS, on the other hand, appeared to be a more intuitive move for Morgan Stanley. The leasing business has little to do with investment banking or brokerage activities, and aircraft leasing had fallen on hard times after the industry downturn over the past few years. Nonetheless, AWAS has 150 aircraft leased to 75 customers in 45 countries. After selling 25 aircraft in the first quarter of 2005, all the division’s planes were leased.
Morgan Stanley did not say whether there were any potential buyers for the division. A spokesman did not immediately return a call seeking comment. The company said it expects to close the sale in mid-2006.
Wednesday’s announcement was Mack’s first opportunity to put his mark on Morgan Stanley since taking over as CEO on June 30. While reiterating the company’s strengths, he said the company needed to be “more aggressively managed” — a possible reference to Purcell, who forced Mack out in a power struggle in 2001.
“We have tremendous assets here, great people, a great franchise,” Mack said. “I don’t think it’s been aggressively managed, and there are areas in which we need to focus and improve.”
Mack noted the hiring of James Gorman, a top Merrill Lynch & Co. executive, to lead Morgan Stanley’s brokerage arm would help address sluggish profit gains in that business. Mack said he will continue to review the company’s operations, including the asset management and institutional banking arms, and promised to cut the company’s bureaucracy.
Morgan Stanley’s board also chose three new directors Wednesday: former BCom3 Group Chairman Roy Bostock; AT&T’s former vice-chairman Charles Noski; and O. Griffith Sexton, adjunct professor of finance at Columbia Business School and a former Morgan Stanley investment banker.