Morgan Stanley Abandons Spinoff Of Discover Unit

The chief executive of Morgan Stanley, John Mack, said the firm will keep its Discover credit card business, abandoning a spinoff plan hatched four months ago by his predecessor, Philip Purcell.The New York-based securities firm, the world’s largest, also said it will sell its aircraft-leasing business, AWAS, and that it elected three new directors to its board, according to a statement. The firm said it expects to take an after-tax noncash charge of about $1 billion in the third quarter because of the sale of the unit, one of the world’s largest aircraft leasing companies with 155 aircraft.“Morgan Stanley management has bigger fish to fry than spinning off Discover,” the publisher of a newsletter that follows the credit card industry, the Nilson Report, David Robertson, said. “Discover is not broken. It’s not bleeding red ink. There is no imperative from disgruntled shareholders to do something about this.”Morgan Stanley’s board began a review of Discover in April when Mr. Purcell, 61, was fighting to keep his job amid a revolt by investors and former executives. The unit, which has about $47 billion of loans, in June reported earnings of $242 million before taxes for the quarter ended May 31, down 19% from a year earlier.Morgan Stanley’s board decided that it was in the “best interests” of shareholders to retain Discover, according to yesterday’s statement.“Our current level of profitability is unacceptable and we need to improve our performance,” Mr. Mack, who became the firm’s CEO on June 30, said in the statement. Discover provides “a consistent stream of stable, high-quality earnings and substantial cash flow, diversifies the company’s earnings and broadens our scale and capital base.”The card unit, led by 44-year-old David Nelms, delivered record before tax earnings of $1.27 billion in 2004, representing 19% of Morgan Stanley’s total pre-tax profit, according to the firm’s statement.“Of course, the U.S. credit card industry is in a low-growth stage right now – about 3% to 5% annually – and the rising cost of funds puts additional pressure on earnings in the short term,” Mr. Mack said in the statement.Mr. Mack, who is 60, has made a series of hires since Mr. Purcell left in June aimed at boosting the firm’s profits and improving morale.Yesterday, he hired Merrill Lynch & Company executive James Gorman to run the firm’s ailing retail brokerage unit. Earlier this month, Mr. Mack began cutting 1,000 of the firm’s brokers.Also yesterday, the firm announced that a current director of Yahoo and Northwest Airlines, Roy Bostock; a former vice chairman at AT&T Corporation and a current director of Microsoft, Charles Noski, and an adjunct professor of finance at Columbia Business School, O. Griffith Sexton, will join its current 11-member board.“Now that John Mack is starting to make his own moves, which we’re seeing today, we think there will be positive developments,” said Paul Hickey, who helps invest $300 million at Birinyi Associates. “Ever since Mack came on board, investors have been buying the stock.”Morgan Stanley fell 11 cents to $52.85 yesterday in New York Stock Exchange composite trading. Mr. Mack may want to sell Discover eventually, the credit card industry analyst Mr. Robertson said in an interview.“Discover has proven it is a profit making enterprise. Given that Washington Mutual is buying Providian and Bank of America is buying MBNA, Discover became more valuable since the announcement it might be spun off,” he said.Mr. Robertson added that the number of possible buyers is fairly small.They include the U.K.-based Royal Bank of Scotland and Barclays PLC, Citigroup, and Fairfield, Conn.-based General Electric, Switzerland’s UBS AG, and Spain’s Banco Bilbao Vizcaya Argentiar SA, Mr. Robertson said.Postponing a sale of Discover would be wise because of the difficulty in valuing the unit, he said.“It makes sense for management to take the time to figure out what this one-of-a-kind entity is worth. I don’t think the new management coming in has had the time to do that,” he said.The Discover card is accepted by about 4.4 million merchants in America and is the third-largest domestic network, following Visa USA and MasterCard International, each of which have about 5.5 million, Mr. Robertson said.Discover ranks sixth in America among credit card companies in terms of outstanding card balances, with $44.4 billion as of June 30. That’s less than one third of the balances held by top-ranked Bank of America, Mr. Robertson said. Combined with its pending purchase of MBNA, Charlotte, N.C.-based Bank of America has $139.7 billion.

Morgan Stanley Abandons Spinoff Of Discover Unit

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