Board Decides to Keep Discover as an Asset
of Morgan Stanley that Can Create Value for Shareholders
and Realize Growth Opportunities
Will
Sell Non-Strategic Aircraft Leasing Business and
Invest Proceeds in Core Businesses to Generate
Higher ROE; Expects Q305 After-Tax Non-Cash Charge
of Approximately $1.0 Billion
Three Respected,
Experienced Business Leaders – Roy J. Bostock,
Charles H. Noski and O. Griffith Sexton – Named
to Board of Directors Morgan
Stanley (NYSE: MWD) today announced that its Board
of Directors has approved several actions intended
to drive improved profitability, growth and returns
to shareholders across the Company's global financial
services businesses. The Company will retain Discover
Financial Services as an important contributor
to shareholder value and will sell its non-core
aircraft-leasing business, AWAS, one of the world's
largest aircraft leasing companies.
The
Board of Directors also elected three new directors:
Roy J. Bostock, former Chairman of B|Com3 Group,
one of the world's leading advertising agencies,
and a current director of Yahoo! Inc. and Northwest
Airlines; Charles H. Noski, former Vice Chairman
of the Board of AT&T and a current director
of Microsoft Corporation and Air Products &
Chemicals, Inc.; and O. Griffith Sexton, an adjunct
professor of finance at Columbia Business School,
a long-time investment banker and a current director
at Investor AB and Hamilton Lane. Mr. Bostock
and Mr. Noski are considered independent directors,
and their election increases the number of independent
directors from 10 to 12.
John J. Mack,
who became Chairman and Chief Executive Officer
of Morgan Stanley on June 30, noted that the Discover
and AWAS actions are initial steps toward improving
the Company's performance. Mr. Mack also emphasized
that one of his top priorities is to implement
the initiatives announced late last month to significantly
improve profitability in Morgan Stanley's retail
brokerage business.
“Morgan Stanley has
tremendous strengths as a global financial services
firm, but it is clear that our current level of
profitability is unacceptable and we need to improve
our performance,” Mr. Mack said. “We must be relentless
in improving profit margins, growth and return
on equity, while continuing to deliver innovative
services to our clients. We have to ensure that
the Firm operates with the scale and flexibility
to compete successfully in a fast-changing, competitive
marketplace. We need to be smarter about using
our capital efficiently as we continue to focus
on risk management. We must also create a more
cohesive culture by reducing bureaucracy and eliminating
insular silos – all with the objective of shaping
a ‘one firm' mentality.
“Our overriding
goal for Morgan Stanley is to be the clear leader
in offering premier, innovative financial services
to our clients, while delivering superior returns
to our shareholders. The decisions to keep Discover,
divest the aircraft leasing business and strengthen
our retail business are our first steps toward
achieving that goal. We will now focus on identifying
other steps we need to take in the months ahead.”
Keeping Discover as a Valuable
Asset The Board of Directors has
decided, based on the results of a recently completed
in-depth analysis, that it is in the best interests
of Morgan Stanley's shareholders to retain Discover
Financial Services. The Board concluded that Discover
can create value for Morgan Stanley shareholders
and realize its growth potential as an asset of
Morgan Stanley.
“Having looked closely
at the Discover business,” Mr. Mack said, “the
Board and I are convinced that Discover is not
only a strong business, but also an attractive
asset for Morgan Stanley. It is a unique, successful
franchise with growth opportunities that gives
Morgan Stanley a consistent stream of stable,
high-quality earnings and substantial cash flow,
diversifies the Company's earnings and broadens
our scale and capital base.”
Among the
considerations in the decision to retain the business
are that Discover:
• Delivered record
before-tax earnings of $1.27 billion in 2004,
representing 19% of Morgan Stanley's total before-tax
earnings and in excess of 19% ROE.
• Enjoys
a strong brand and a loyal customer base of 50
million Cardmembers.
• Added more than one
million merchant locations to its Discover Network
in 2004 and is now accepted at more of the top
100 U.S. retailers than any other credit network.
• Has significantly improved credit quality
over the past three years, and, in the second
quarter of 2005, reported an over-30-day delinquency
rate of 3.9% on managed loans,
the lowest
in 15 years.
• Is poised for new growth due
to a favorable 2004 court ruling that allows the
Discover Network to partner with financial institutions
in the U.S. for the first time.
• Launched
new partnerships with GE Consumer Credit, offering
Wal-Mart- and Sam's Club-branded cards on the
Discover Network.
• Acquired the fast-growing
PULSE debit network in January 2005. PULSE has
more
than 4,100 financial institution customers.
• Recently formed a new partnership with China
UnionPay, China's largest payment network with
800 million cards.
• Has a growing Morgan
Stanley card business in the U.K.
• Benefits
from certain synergies between Discover and Morgan
Stanley, including lower funding costs for Discover
as well as shared corporate functions and the
ability to leverage resources.
“Of course,
the U.S. credit card industry is in a low-growth
stage right now – about 3 to 5% annually – and
the rising cost of funds puts additional pressure
on earnings in the short term,” Mr. Mack added.
“But given the strengths of Discover, its powerful
brand name and its continuing strong ROE, retaining
the business and investing in it over time give
us a good chance to create value through domestic
growth in excess of industry trends, growth in
international profit and the unique opportunities
in the payments business.”
In April, the
Board of Directors authorized the analysis of
Discover as a possible spin-off. The analysis
included, among other things, an evaluation of
capital structure, financial projections, credit
ratings and anticipated market valuations, together
with consideration of the value of Discover to
Morgan Stanley. After careful examination of the
completed analysis, Mr. Mack recommended to the
Board of Directors that Morgan Stanley retain
Discover, and the Board agreed.
Opportune
Time to Exit Non-Strategic Aircraft Leasing Business
The Board of Directors also has determined
that it is in the best interests of Morgan Stanley's
shareholders to sell AWAS, its non-core aircraft
leasing business, and redeploy the proceeds of
the sale back into the Company's core businesses
with the goal of delivering a higher return on
equity for the Company and its shareholders.
“Aircraft
leasing is not a business that fits with our strategy,”
Mr. Mack said. “We have long made it clear that
we should divest this business and focus on our
core financial services. Today, we believe that
the marketplace offers the opportunity to execute
a transaction, in light of several other recent
transactions and expressions of interest in our
business. While this will mean a significant after-tax,
non-cash accounting charge, there is no question
that we now have an opportunity to execute a sale
that brings in the best value for our shareholders,
given the current market for these assets.”
AWAS
is one of the world's largest and most experienced
aircraft leasing companies, with 155 aircraft
leased to 75 customers in 45 countries. With the
aircraft-leasing markets on an upturn over the
past 12 months, lease rates and leasing activity
have improved. In the first quarter of 2005, AWAS
completed the divestiture of 25 planes that had
been held for sale. As of the end of the second
fiscal quarter, AWAS had no planes on the ground,
with all of the aircraft in the portfolio either
leased or committed to a lease transaction.
The
Company will take an after-tax, non-cash accounting
charge in the third quarter to write down the
value of this business to its estimated market
value. Based on information currently available,
it estimates the charge after taxes at approximately
$1.0 billion. The Company said that this estimate
might be adjusted as additional information becomes
available and discussions with potential purchasers
begin. The sale process will begin immediately,
with the closing of a transaction anticipated
in mid-2006.
Initiatives to Improve
Performance in Retail Business “Our
retail brokerage operation generates strong revenue
for the Company,” Mr. Mack said. “But it faces
tough competition in the marketplace, and we are
going to work hard to substantially improve the
productivity and profitability of this key business,
while maintaining a sharp focus on client needs.
Our retail strategy focuses on the more profitable,
wealthier client segments and on increasing the
number of top-quality financial advisors and investment
representatives we need to serve those clients.
We believe the steps we are taking should drive
a significant improvement in margins.”
As
announced yesterday, James P. Gorman has been
named President and Chief Operating Officer of
the Individual Investor Group, effective February
2006, responsible for leading Morgan Stanley's
global retail sales force. Mr. Gorman will be
a member of Morgan Stanley's management committee
and report to Acting President Zoe Cruz.
The
Company is taking specific actions to restructure
and enhance the performance of the retail sales
force, including increasing the effectiveness
of its financial advisor training program, reducing
headcount and working to generate new revenue
streams, including banking and deposits. These
initiatives are designed to take advantage of
favorable longterm trends in the retail business
and marketplace, such as the growing numbers of
highnet- worth clients, now the fastest-growing
market segment for the industry. Morgan Stanley
has identified many opportunities to improve its
offerings for these clients in key areas such
as financial planning, alternative investments,
retirement vehicles, liability products and deposits.
Three New Members Elected to the
Board of Directors
Commenting on
the election by the Board of Messrs. Bostock,
Noski and Sexton, Mr. Mack said, “The Board has
elected three individuals who are respected and
experienced business leaders. They will make major
contributions to our business strategy and represent
the highest standards of governance. Their appointments
will help ensure that the Firm achieves the best
possible, most objective sources of advice and
oversight available.”
Miles Marsh, Morgan
Stanley's Lead Director, said, “Our Nominating
and Governance Committee recommended Roy Bostock,
Chuck Noski and Griff Sexton because they add
breadth of experience and perspective to the Board.
All three have wide exposure to the many complex
and demanding issues involved in the governance
of major blue-chip, publicly traded companies,
as well as the needs of institutional investors
and management. Their skills, talents and ideas
are a welcome addition to our Board and we look
forward to working closely with them.”
Mr.
Bostock, 64, currently serves as Chairman of the
Partnership for a Drug Free America. Until 2001,
Mr. Bostock was Chairman of B|Com3 Group, an advertising
and marketing services firm that is now part of
the Publicis Group. Mr. Bostock played a major
role in building some of the most prominent advertising
firms in the U.S., beginning with Benton &
Bowles in 1964. Following the creation, through
a merger, of D'Arcy Masius Benton & Bowles
in 1985, Mr. Bostock became President of the combined
firm. By 1990, he had also served as Chief Operating
Officer and was named Chairman and Chief Executive
Officer. In that capacity, he saw the agency through
several more transactions. In 2000, the agency
was renamed the B|Com3 Group and Mr. Bostock became
Chairman. Mr. Bostock is a member of the boards
of directors of Northwest Airlines and Yahoo!
Inc. and a Trustee Emeritus of Duke University.
A graduate of Duke, he has an MBA from Harvard.
Mr. Noski, 52, was most recently Corporate
Vice President and Chief Financial Officer and
a director of Northrop Grumman Corporation. Prior
to joining Northrop in 2003, Mr. Noski was a senior
advisor to the Blackstone Group. Earlier, Mr.
Noski was Senior Executive Vice President and
Chief Financial Officer as well as Vice Chairman
of the Board of AT&T. Mr. Noski has also been
President, Chief Operating Officer and a director
of Hughes Electronics Corporation and a partner
with Deloitte & Touche. He is a member of
the boards of directors of Microsoft and Air Products
& Chemicals. He holds a master's degree in
accounting and a bachelor's degree in business
administration from California State University,
Northridge.
Mr. Sexton, 61, is an adjunct
professor of finance at Columbia Business School
and a visiting lecturer at Princeton University,
where he teaches courses in corporate finance.
Prior to his academic career, Mr. Sexton was an
investment banker at Morgan Stanley from 1973
to 1995, where he was engaged in the development
and execution of advisory assignments involving
a wide variety of corporate financial transactions.
Since 1995, he also has served as an active advisory
director of Morgan Stanley. He is a member of
the boards of directors of Investor AB, a publicly
traded Swedish investment company, and Hamilton
Lane, a privately held asset-management company
based in Philadelphia. A former U.S. naval aviator
and Vietnam veteran, Mr. Sexton holds a BSE from
Princeton and an MBA from Stanford.
Conference
Call Today The company will hold
an analyst conference call today at 5:15 pm (ET).
Live audio of the conference call will be available
on the Morgan Stanley website at www.morganstanley.com
or by dialing 1-877-810-2615 (pass code 50371139)
in the United States. International callers dial
617-786-8334 (pass code 50371139). A playback
of the call will be available today at the same
web site address. To listen to the playback dial
1-888-286-8010 (pass code 74395699) within the
United States or 617-801-6888 (pass code 74395699)
internationally.
About DiscoverDiscover
Financial Services, Inc., a business unit of Morgan
Stanley (NYSE:MWD), operates the Discover Card
with more than 50 million Cardmembers, the Discover
Network with more than 4 million merchant and
cash access locations and the PULSE ATM/debit
network currently serving more than 4,100 banks,
credit unions and savings institutions. For more
information, visit
www.discovercard.com ,
www.discovernetwork.com or
www.pulse-eft.com About AWASHeadquartered
in Seattle and with offices in New York, Miami,
London, Singapore and Sydney, AWAS is one of the
world's leading aircraft leasing companies, trading
in the very competitive and highly specialized
market of aviation operating leases. AWAS currently
owns 155 modern Stage 3-type jet aircraft and
has airline customers situated in 45 countries
around the world. AWAS is managed by a team of
aviation industry professionals. Additional information
about AWAS can be found by visiting its website
at
http://www.awas.com
About Morgan Stanley
Morgan Stanley is a global financial services
firm and a market leader in securities, investment
management and credit services. With more than
600 offices in 28 countries, Morgan Stanley connects
people, ideas and capital to help clients achieve
their financial aspirations.
FORWARD
LOOKING STATEMENTSThis release may
contain forward-looking statements. Readers are
cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date on
which they are made, which reflect management's
current estimates, projections, expectations or
beliefs and which are subject to risks and uncertainties
that may cause actual results to differ materially.
In particular, the Company's ability to effect
a sale of the Company's aircraft leasing business,
to realize the full extent of cost savings or
benefits from such sale and to assure that subsequent
developments (including the ultimate structure,
pricing and timing of the transaction) do not
cause actual charges to exceed the currently estimated
charges to be incurred in the transaction may
cause actual results to differ materially from
the Company's current estimates, projections,
expectations or beliefs. In addition, the future
performance of Discover Financial Services is
subject to numerous risks impacting the credit
card industry that may cause actual results to
differ materially from the Company's current estimates,
projections and beliefs, including: rising cost
of funds pressuring spreads; slow industry growth
with rising payment rates; future loan loss rate
uncertainty, especially given bankruptcy reform
and changing minimum payment requirements; and
a consolidating industry with competitive pressures
and increasing marketing constraints. For a discussion
of additional risks and uncertainties that may
affect the future results of the Company, please
see “Forward-Looking Statements” immediately preceding
Part I, Item 1, “Competition” and “Regulation”
in Part I, Item 1 and “Certain Factors Affecting
Results of Operations” in Part II, Item 7 of the
Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 2004 and “Management's
Discussion and Analysis of Financial Condition
and Results of Operations” in the Company's Quarterly
Reports on Form 10-Q for the quarterly periods
ended February 28, 2005 and May 31, 2005 and in
other items throughout the Form 10-K and Forms
10-Q.