The Morgan Stanley board decision reflects the majority view that a spin-off would give the Discover division, valued at over $9 billion by an FT report, the freedom to prosper, as an independent Discover would be able for the first time to work with other financial institutions to grow its network in the US.
The move, which comes in the wake of the recent court decision outlawing the anti-competitive practices of Visa and MasterCard and thus opening up the credit card industry, compliments other recent actions taken by Discovery.
The credit card issuing division has acquired the PULSE debit network, providing relationships with approximately 4,100 financial institutions and over one million merchants. Furthermore, Discover recently announced a partnership with GE Consumer Credit to issue a Walmart card and a Sam’s Club card on the Discovery network.
However, under fire chairman and CEO of Morgan Stanley, Philip Purcell, who had set up Discover while at Dean Witter, had opposed the spin-off for some time before changing his mind ahead of the announcement.
This is the right time for the board of directors and management to consider such action, said Purcell. Each business – securities and payments – is exceptionally well positioned in its respective marketplaces, with world-class brands, strong momentum and significant growth opportunities.
The rationale for this action is twofold: 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, Purcell added.
Discover Financial Services Division, which includes the Discover Card, reported record earnings in 2004 and in the first quarter of 2005. Discover is among the largest credit card issuers in the US with more than 50 million cardmembers and $48 billion in managed loans.
