Discover Financial Services said Friday it would pay $775 million to Morgan Stanley, under the terms of a settlement, closing the chapter on a legal battle with its former parent.
The settlement, reported Friday in a filing with the Securities and Exchange Commission, won't affect Discover's bottom line because the company had already squirreled away reserves, totaling $809 million as of Nov. 30, in anticipation of a payment to Morgan Stanley.
Morgan Stanley last month won a legal ruling under which Discover was obligated to pay as a special dividend over almost $800 million Morgan Stanley says it was owed. Discover had said it would appeal the ruling
"On a positive note, the settlement limited the amount Discover had to pay Morgan Stanley," said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, in a research note published Friday. Sakhrani has the equivalent of a 'buy' rating on Discover shares.
At issue is money stemming from a $2.75 billion antitrust settlement payment Discover received from Visa Inc. and MasterCard Inc. as part of a 2004 lawsuit.
Morgan Stanley, which had acquired Discover in the 1990s as part of its merger with brokerage firm Dean Witter, spun off the card company into an independent entity in 2007. As part of the spinoff, the companies agreed that Morgan Stanley was entitled to receive a portion of Discover's settlement.
But Riverwoods, Ill., Discover contended that Morgan Stanley had breached the spinoff agreement by meddling in the Visa-MasterCard settlement. It declined to pay the dividend.
That prompted Morgan Stanley to file suit against Discover in a New York state court last fall. Morgan Stanley claimed that it was owed $1.2 billion of the $2.75 billion settlement. After taxes, that comes to about $785 million, plus interest.
As part of the settlement announced Friday, Discover also dropped its pending case against Morgan Stanley, under which it sought claims for damages from Morgan Stanley "for their breach of contract and tortious interference in settlement negotiations between Discover, Visa and MasterCard."
A spokesman for Morgan Stanley said "we are delighted with this outcome." A spokesman for Discover declined to comment beyond the regulatory filing.
Discover shares recently traded at $13, down 0.31% on the day. Morgan Stanley shares were at $27.06, down 0.22%.