Business: Discover's spinoff gets reassessed

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Discover's spinoff gets reassessed

NEW YORK - Morgan Stanley's proposed spinoff of its Discover Financial Services division will face a critical test next week when the company's board of directors weighs whether the plan makes sense amid the firm's management changes.

The Wall Street Journal, citing unidentified sources familiar with the situation, reported Friday that Morgan Stanley may opt not to pursue the spinoff. The upcoming retirement of chairman and chief executive Phil Purcell, a surprise announcement made Monday, may prompt the board to postpone its decision until new leadership is in place.

Also, the proposed spinoff may require Morgan Stanley to provide the stand-alone Discover company with more capital than it can afford, the Journal reported.

Morgan Stanley spokesmen declined comment on the report, citing the federally mandated "quiet period" before it announces its earnings on Wednesday. A spokeswoman for Discover had no comment.

Shares of Morgan Stanley fell 52 cents to close at $51.38 in Friday trading on the New York Stock Exchange.

In April, the Morgan Stanley board authorized the company to pursue a spinoff of Discover, which was a part of Dean Witter Discover & Co. prior to the 1997 takeover of Morgan Stanley. Discover had been championed by Purcell, the former head of Dean Witter who led the combined company after the merger, and the spinoff was seen as a conciliatory gesture by the embattled CEO, who was under fire for allowing a number of highly regarded employees to leave the company.

The pressure on Purcell built through April and May, until his announcement Monday that he would leave the company to avoid further acrimony. Purcell plans to stay in his job until a replacement is found, but the spinoff of Discover may be too large a move to consider until more permanent leadership is found.

On Tuesday, Morgan Stanley's management committee is expected to report to the board on whether the Discover spinoff is viable and in the company's best interest. Morgan Stanley has repeatedly stressed that the spinoff was not a done deal, and the board could ultimately decide not to pursue it further.

The Discover divisions represents nearly one-fifth of Morgan Stanley's pretax net income, and is a steady source of cash flow for an investment bank whose fortunes would otherwise rest on often-volatile market conditions.