Discover Closer To IPO, Reports Increase In Marketing

DFS will be the symbol under which Discover Financial Services is traded once it files for an initial public offering of stock after being spun off by Morgan Stanley. In a filing with the Securities and Exchange Commission late last week, Morgan Stanley disclosed it would have no stake in Discover, the nation's fourth-biggest credit card brand, after the transaction is completed in the third quarter.

Morgan Stanley announced in December that it would spin off Discover following a trend among cardholders. Rival MasterCard Worldwide went public last year, and Visa is restructuring its Canada, U.S. and international divisions into a single entity, which it plans to take public this year.

Discover is widely believed to be well-positioned as a stand-alone company: it enjoys strong brand recognition and is considered a rewards leader. It also has room to grow. With 50 million cardholders, it ranks fourth in the U.S. after Visa, MasterCard and American Express. Even so, it earned $1.5 billion in 2006 on record revenue of $4.3 billion, and receivables approached $50 billion.



"Their rationale makes an awful lot of sense at the moment," Ned Riley, chief investment officer of Boston-based Riley Asset Management, tells the Chicago Tribune." They feel Discover is under-priced relative to the entire company, and this will allow them to get a higher value from the asset than was being priced by Wall Street analysts."

Competition among credit card brands has heated up since a Supreme Court ruling in 2004 upheld an antitrust lawsuit against Visa and MasterCard to allow retail banks to issue competing cards from Discover and American Express. Now, Citibank, Bank of America and others offer their customers American Express cards.

In reporting first-quarter results, Morgan Stanley said that Discover's transaction volume increased 13% from a year ago due to higher sales stemming from increased card usage and the acquisition of the UK-based Goldfish credit card business. Non-interest expenses increased 7%, to $653 million--due in part to higher marketing costs and the inclusion of operating expenses associated with the Goldfish acquisition.

Next story loading loading..