Stock analysts have been sketching various exit strategies for Discover Financial Services since shortly after the company's stock began trading on the New York Stock Exchange in July.
  Craig Maurer, an analyst with Credit Agricole Group's Calyon Securities, in late October issued a report suggesting Discover was ripe for takeover. Discover, "while not presenting competitive fundamentals with its peers, is currently trading at a significant discount to where a select few companies might find it attractive as an acquisition candidate," Maurer wrote.
  A team of Morgan Stanley & Co. analysts who recently initiated independent coverage of Discover asserted in its own report in August that Bank of America Corp., Citigroup and JPMorgan Chase & Co. are among the large banks that might benefit from acquiring Discover.
  The analysts speculated that if a large bank "might want to own its own network," then Discover could make a good acquisition.
  "Ironically, our work suggests the company could realize the most value with the least risk by shutting down the Discover network, which is patently subscale, and issuing cards on the Visa/MasterCard networks," wrote Kenneth Posner, lead author of Morgan Stanley's report.
  Such a decision could save the company an estimated $350 million a year by no longer having to operate its network. It also could boost Discover's revenues by as much as $200 million per year from MasterCard's and Visa's higher interchange rates, Posner wrote.
  Teaming the Discover brand with either a MasterCard or Visa acceptance mark would provide immediate channels for retail distribution and global acceptance, Posner noted. "Management is focused on leveraging the network on its own, a strategy we think faces tough odds but one where flawless execution could produce improved results," he wrote."
  In any case, a sudden buyout of Discover is unlikely. It would be unusual for a tax-free spin-off such as Discover's separation from Morgan Stanley to result in a sale in less than two years, says Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods.
  (c) 2007 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com
 

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry