Wall Street Mentality Flawed--Can hurt local economy

In today's climate, a company earning over $1 billion can be considered underperforming... bizarre. Discover Card: Grow or be sold 2,400 local jobs at risk as Morgan Stanley CEO battles sagging stock February 07, 2005 By Steve Daniels Discover Card's prospects of being sold appear increasingly strong, putting at risk more than 2,400 jobs at the credit card concern's north suburban Riverwoods headquarters. Under fire from investors impatient with the stagnant stock price of Discover parent Morgan Stanley, Philip Purcell, CEO of the New York investment bank, recently told analysts he would consider divesting Discover if it couldn't show significant growth in the next two to three years. continued below Advertisement Any sale of the unit, known as Discover Financial Services, would likely mean big job cuts as an acquirer looks to cut costs. Potential buyers could include foreign banks like Royal Bank of Scotland or British giant HSBC Holdings plc, which last year bought Prospect Heights-based Household International Inc., a consumer lender. Or they could be credit card giants like Citigroup Inc. or J. P. Morgan Chase & Co. For now, the pressure is on Discover CEO David Nelms to deliver growth. Discover and American Express Co. recently won a years-long court battle challenging the Visa and MasterCard networks' virtual stranglehold on cards issued by banks. The sixth-largest U.S. card issuer, Discover loan balances have remained close to $50 billion the last five years; growth has been difficult to achieve in the glutted card market. Discover is profitable. Declining cardholder defaults last year sent its pretax income up 17% to $1.27 billion. Another positive: Discover's deal in January with General Electric Co.'s consumer finance unit and Wal-Mart Stores Inc. to create a Wal-Mart Discover card, Discover's first major foray into store-branded cards. (GE will be the card issuer and own the loans; Discover will provide the payment network.) Mr. Nelms was out of the country last week and unavailable for interviews. Speaking to analysts last month, Mr. Purcell, instrumental in creating the Discover Card as a Sears, Roebuck and Co. executive in the mid-1980s, said he wanted to see how Discover performs after the court decision and its Wal-Mart deal before making a decision about its future. He expressed confidence in the card's growth prospects. "Right now, I'm very, very enthusiastic," he said. He wouldn't comment for this story and a spokesperson wouldn't elaborate. BAD OUTLOOK FOR GROWTH Some analysts and card-industry consultants are betting that Discover, known best for its policy of refunding 1% of the dollars its users spend, won't grow enough in the brutally competitive card market to forestall a sale. Credit cards "are increasingly a scale-driven business, and if Morgan Stanley can't grow it beyond the $50-billion level, the economies of scale are going to work against them," says Jeffery Harte, managing director at investment banking firm Sandler O'Neill & Partners L.P. in Chicago. By comparison, industry leader J. P. Morgan Chase has $135 billion in credit card loans. DISCOVER'S ROADBLOCKS He and others believe Discover can enlist more stores to accept its card given its cheaper merchant-transaction charges than Visa, MasterCard and American Express. But they question whether card-saturated consumers will use it more. Many other cards offer cash rewards, and some exceed Discover's customary 1% refund. Another impediment: The easiest way to grow — purchasing loan portfolios from companies wanting out of the card business — isn't really open to Discover, since most other cards use the Visa and MasterCard network. In acquiring such a portfolio, Discover likely would lose some customers in switching the accounts to Discover cards. ©2005 by Crain Communications Inc.>