NEW YORK — Morgan Stanley Chief Executive Philip Purcell said the company will spin off its Discover credit-card unit to shareholders because it will be worth more as a separate company than as part of a big securities firm.
"Discover will be more properly valued as a stand-alone entity," he said in a call with analysts, essentially reversing a strategy that began when Dean Witter Discover bought Morgan Stanley in 1997. Purcell has consistently said that Dean Witter's retail brokerage, asset management and credit-card businesses were strong supplements to Morgan Stanley's strength as an investment bank.
In recent weeks, eight former Morgan Stanley executives and some investors have attacked Purcell's strategy, saying the focus away from institutional securities has weakened the company's stock price and profitability. Purcell on Monday defended the strategy to retain the retail brokerage and asset management unit.
"This makes it very clear that the remaining Morgan Stanley is in the securities business," he said. "Hopefully, it ends any conversations that we are not in the retail or asset management businesses."
While Morgan Stanley could sell all or part of Discover, Purcell said the preference is to divest it to Morgan Stanley shareholders because that is more tax-friendly to investors. "We are pursuing a spin rather than any other way," he said. "We are not pursuing a sale of this business."
Morgan Stanley Chief Financial Officer David Sidwell said he anticipates the spinoff could be completed within three to six months. Purcell said the company has a lot of work to do on the mechanics of creating a balance sheet, discussing the spinoff with credit rating agencies and determining whether Discover shareholders would be paid a dividend.
A source close to the company's board said a presentation on the plan was made earlier Monday to rating agencies.
In interviews before the conference call, a spokesman for the executives calling for Purcell's resignation said a spinoff or sale of Discover would not end their campaign.
"It wouldn't change things at all," said Andrew Merrill, who represents former Morgan Stanley President Robert Scott, who was forced out in 2003 by Purcell, and other executives. "We continue to want to see a change in leadership."
Scott Sipprelle, a former Morgan Stanley official who runs a hedge fund, has called for the company to sell Discover as well as the retail and asset management businesses.
Discover is the seventh-biggest credit card by receivables outstanding, a key measure of profitability. David Neims, the chief executive of the card unit, said the company is shifting its focus away from reducing losses on bad loans to increasing use of the card. It will do this by increasing its roster of merchants that exclusively accept Discover, by expanding into debit cards and other electronic payment alternatives and by growing overseas.
Discover, which last year signed over 1,000 merchants to exclusively accept the card, earned a profit in its United Kingdom unit over the last two years after four years of losses, he said.
It ended last year with more than 40 million cardholders, $48 billion in managed loans and 4 million merchant and cash-access locations. The loan balances and cardholder statistics are well behind those of banks that issue cards through Visa and MasterCard.
Separately, Morgan Stanley on Monday said it had added $100 million to a loan loss reserve for litigation brought against it by financier Ronald Perelman, who has received several favorable opinions in his court battle. Perleman sold his majority interest in camping equipment manufacturer Coleman Co. in 1998 to Sunbeam, which was represented by Morgan Stanley. The Sunbeam shares he received subsequently plunged after fraud was uncovered at the company, and Perelman says Morgan Stanley should have known about the fraud.
The addition brings the reserve for the lawsuit to $360 million, and will cause the company to reduce its previously announced fiscal first-quarter earnings to $1.40 billion from $1.46 billion, and its earnings per share to fall 6 cents to $1.29.
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