Morgan Stanley spin-off….a good Discovery?
If you haven’t heard already Morgan Stanley plans on spinning off it’s Discover Card unit at the end of the month. Morgan Stanley currently owns 100% of the Discover stock, and plans to distribute it’s shares to current Morgan Stanley shareholders to the tune of one share of Discover (DFS) for every two shares of Morgan Stanley (MS). The distribution will have a record date of June 18th with trading of DFS to start on July 2nd.
This spin-off intrigues me, first because I’m a shareholder of MasterCard (MA), and secondly because I believe there might be some value that can be unlocked with the spin-off. I believe the card services industry is a solid cash generating industry with fat margins and limited competition. There are two main players Visa and MasterCard, Visa is estimated to control 61% of the market with MasterCard controlling 29%. That leaves 10% for American Express and Discover. Discover reports in it’s prospectus that it controls 5.6% of the market. I’m unable to find figures for American Express but I’m willing to believe that Visa’s share is a little lower and Amex is higher.
I would like to do a fairly exhaustive analysis of this spin-off, but I have a feeling it will need to be broken into a few different posts. In this post I will discuss the general business climate and factors that created this spin-off. I’m currently digging into the prospectus at EDGAR so I’m hoping to have a financial analysis up in a few days in a new post.
General Business Climate
The present is a great time for the card payment industry, everyday more consumers are turning to credit cards and debit cards for payment instead of using traditional cash and checks. Part of this is convenience it’s easier to carry around a card than a wad of cash if you’re not sure what or how much you’re going to purchase in a given day. Consumers are also turning to cards for identity theft protection, credit cards give certain protections that cash does not. Another big driver is the Internet. To complete a purchase on the internet a consumer must either pay using a linked bank account and a service such as PayPal, Google Checkout, BillPay, or use a credit card.
Spin-off
There was a very interesting article in the Wall Street Journal in the past few weeks detailing Morgan Stanley’s turnaround. To give a rough history Morgan Stanley is a large investment bank with institutional investors. A few years back they merged with Dean Witter to grow the personal brokerage services for small investors. The merger was a complete failure and Morgan Stanley is now shedding some of those personal brokerage services. But in the meantime the private equity and hedge fund industry has taken off, all while Morgan Stanley sits on the sidelines. Morgan Stanely brought back a previous CEO to be their current CEO in the last two years. The current CEO wants to have the institution focus on investment banking and private equity deals, and Discover is getting in the way of that. Morgan Stanley believes that they can enhance shareholder value by focusing on their core business and shedding a distraction which is Discover. Discover is a profitable venture on it’s own and provides a steady revenue stream to Morgan Stanley.
I liked the tone of the new CEO, I believe focusing on core competencies is a recipe for success. What worries me is that the private equity and hedge fund focus might be aligning the bank on a fad that could quickly bust.
This is just a general 10,000ft overview. As I posted above I’m still digging through the prospectus and looking at the financials and plan on detailing what this could mean for the stock in the next post.
Disclaimer: I am not an investment professional and if you plan on acting on any of my writings please consult one before making any decisions. Investing in equities may result in you losing some or all of your money. My posting of equities does not constitute a recommendation to buy or sell, these thoughts are soley my opinion alone. You are responsible for your own actions. I try to verify each item I post about but I can and do make mistakes please consult with an investment profession with any questions you might have.