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. Last Updated: 07/27/2016

Discovery Card Set to Change Owners

NEW YORK -- Morgan Stanley chief executive Philip Purcell, under growing pressure from some investors to resign, on Monday abandoned a long-held strategy by agreeing to spin off the investment bank's Discover credit card business.

For many years Purcell, 61, stood by the company's financial supermarket structure despite criticism that more specialized investment banking rivals were providing better returns to investors.

But on Monday Purcell bowed to pressure, analysts and money managers said, after a week of turmoil when some shareholders publicly demanded his resignation and senior executives left the firm amid a management shake-up.

"This is definitely a reversal," said analyst Dick Bove of Punk Ziegel & Co. "This is a move taken under duress. The board is feeling a great deal of pressure to do something."

The New York-based bank said management would submit recommendations to the board for final determination, and a spin-off could be completed within six months. The firm declined to disclose financial details about the spin but predicted the separation would help Discover grow faster and free up Morgan Stanley to focus on its securities businesses.

"The two businesses compete in two different arenas. It's the right time for Discover to be on its own given the new opportunities for the brand and its network," Purcell said in a conference call late Monday. "Discover can deliver more shareholder value to our investors as a stand-alone entity."

Shares of Morgan Stanley surged more than 5 percent Monday on reports the board had authorized management to pursue a sale of the Discover business. The shares closed at $58.30, up 2.5 percent for the day.

The spin-off decision marks a dramatic reversal of strategy by Morgan Stanley, which for years resisted calls from investors urging the sale of Discover. Late last year hedge fund manager Scott Sipprelle, a former Morgan executive, urged the board to break up the company.

Sipprelle said Discover and the company's retail brokerage were mediocre businesses holding back Morgan Stanley's returns and stock price.

Famous for its cash-back rewards program, Discover is the seventh-largest U.S. credit card issuer with about 50 million customers and $48 billion of outstanding loans.

The unit also operates the fourth-largest credit card network with 4 million merchants, and recently expanded into debit card payments with its purchase of Pulse EFT.

Combined, these credit card and payment businesses generated record profit of $1.27 billion last year, or a fifth of Morgan Stanley's earnings. Analysts have estimated the unit would be worth as much as $10 billion as a separate company.