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July 11, 2007

Discover debuts on US stock market

Fresh from its spin-off from Morgan Stanley, Discover Financial Services, the fourth-largest of the US card networks, has begun trading publicly on the New York Stock Exchange Its shares rose modestly during early trading on 2 July before tailing off, but analysts are optimistic that shares will rise in the long term, and that the network will gradually increase its market share against its larger competitors Visa, MasterCard and American Express.

By Verdict Staff

Fresh from its spin-off from Morgan Stanley, Discover Financial Services, the fourth-largest of the US card networks, has begun trading publicly on the New York Stock Exchange. Its shares rose modestly during early trading on 2 July before tailing off, but analysts are optimistic that shares will rise in the long term, and that the network will gradually increase its market share against its larger competitors Visa, MasterCard and American Express.

In particular, Discover is expected to gain a larger slice of the growing US debit market. The network recently launched a range of debit-orientated offerings.

Morgan Stanley announced in December 2006 that it would spin off Discover to allow the investment bank to focus on its investment banking business. Industry analysts are confident that Discover will perform well as a stand-alone business.

Discover’s key advantages

In 2006, Discover recorded $4.3 billion in revenue, its highest revenue figure to date. The Discover spin-off follows MasterCard’s initial public offering (IPO) in May 2006 and comes ahead of Visa’s forthcoming transition to a publicly traded company. Since MasterCard’s $2.39 billion IPO, its share price has risen from $39 to about $165. Most analysts are pricing Discover’s shares around the $29 to $31 range.

Moshe Orenbuch, an analyst at investment bank Credit Suisse First Boston, believes that Discover has some key advantages that will allow it to make headway.

“As a network, Discover is the lowest-cost network for merchants and is working to expand coverage of small- and mid-sized merchants domestically, and signing partnership agreements to extend its coverage internationally. Its acquisition of the Pulse network in 2005 gave the company access to the fast-growing debit market,” he said.

“[Discover’s] management is focused on increasing its share of wallet in its US card business, as the company has an enviable base of 45 million accounts.

“About 10 percent of managed receivables are in the UK, and the focus is to reduce the losses and return the UK business to profitability during 2008.”

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