(AP) After a day of speculation that Morgan Stanley was planning to sell its Discover Card division, the company said late Monday its board instead had voted to spin off its credit card unit to existing shareholders.

The move by embattled Morgan Stanley Chairman and Chief Executive Philip Purcell and his fellow board members still could be trumped if a bidding war for Discover emerges, but analysts saw it as a smart maneuver to deflate arguments raised by dissident investors. Shares of the Wall Street brokerage house, which gained more than 2.5 percent on media reports of the potential Discover sale during regular trading, rose another 1.5 percent to $59.15 in after-hours trading.

Earlier Monday, the dissident shareholder group, which includes former Morgan Stanley executives, stepped up a letter-writing campaign and called for the removal of Purcell in a full-page newspaper ad. Purcell and the board both sent memos to employees, reassuring them on the company's direction.

Purcell blamed media coverage for blowing the management shakeup out of proportion and said the replacement of President Stephan Newhouse with new co-presidents Zoe Cruz and Stephen Crawford was necessary for the health of the company. Underscoring the commitment to Cruz and Crawford, the company announced Monday that both had been elected to Morgan Stanley's board, bringing the number of directors to 13.

In a release accompanying the Discover announcement, Purcell said that it was "the right time" for the spinoff, which would leave the credit division as a stand-alone business. He did not provide details of how many shares of Discover stock would be distributed to shareholders for each existing Morgan Stanley share.

"The rationale for this action is twofold," Purcell said. "One, to maximize the shareholder value in the Discover Card division, and allow management of that business to capitalize on the momentum, both in performance, and in the opportunities opening up in the payments market, and two, to further intensify our focus on the high return growth opportunities within our integrated securities businesses."

In a conference call with analysts Monday evening, Purcell and other executives said they "felt great" about the spinoff, which was expected to take place within three to six months. Purcell underscored that the firm was pursuing a spin off rather than a sale, in part to limit the related tax bill, and said the move represents a return to the firm's core business.

"This makes it very clear that Morgan Stanley is in the securities business," Purcell said. "Hopefully, it ends any conversations that we are not in the retail or asset management businesses."

Richard Bove, a securities industry analyst with Punk, Ziegel & Co., said the moves to spin off the Discover unit and pack the board with two more members who are clearly in favor of the company's current management could be a setback for the dissident shareholder group. Combined, they were "brilliant steps to ensure current management will be around for a while," Bove said.

"I think, for the moment, management has won the struggle. It has eliminated the division people were most concerned about and the board is now even stronger in its favor," Bove said. "We now have to wait. If earnings do well, and I think they will, management will have succeeded. But if earnings falter, or a large number of people leave the company, then what happens next is an open issue."

One thing that could throw the future into question would be if the dissident group could persuade a third party to make a hostile bid for Morgan Stanley in its entirety, Bove said. But takeovers of that sort are uncommon in the investment banking industry. On top of which, the dissident group had already called for the sale of the Discover unit, which Bove values at about $11 billion.

The Discover Card business came to Morgan Stanley through its merger with Dean Witter Discover & Co. in 1997. Last Wednesday, Morgan Stanley reported that the division had pretax earnings in the latest quarter of $380 million, a quarterly record. Morgan Stanley also acquired the PULSE EFT Association network, which manages merchant transactions, on Nov. 15 to complement the card business. Additionally, Discover recently announced a partnership with GE Consumer Credit to issue a Wal-Mart card and a Sam's Club card on the Discover network.

The credit card business had been seen by analysts as a poor fit with Morgan Stanley, which does not have a consumer banking division. Dean Witter had tried to parlay the Discover Card business into an entire discount brokerage arm, but that ultimately folded after it was acquired by Morgan Stanley.

The Independent newspaper in London reported Sunday that HSBC Holdings PLC might seek to buy all of Morgan Stanley for 40 billion British pounds ($74.9 billion), though analysts said such a purchase would be too big for HSBC to manage. Bank of America has also been mentioned as a possible bidder for the Discover unit.

Meanwhile, the dissident shareholders and former executives, led by former Chairman S. Parker Gilbert and former President Robert G. Scott, took out a full-page ad in The Wall Street Journal, telling Morgan Stanley employees "not lose hope" as the group works to change the company's leadership.

In a weekend memo to employees obtained by The Associated Press, Purcell addressed recent management changes that had resulted in the unexpected departure of at least three key executives in the company's investment management division.

"Despite all the sturm und drang of the last week ... the board cares about this firm," Purcell wrote. "Your senior management cares about this firm."

The board, in an employee memo issued Monday, defended the company's profit growth and stock price, which had been attacked by the dissident group as lagging behind competitors, and voiced confidence in Purcell.

"The board ... is fully behind Phil Purcell and your management team," the board memo said. "There is no fair or compelling case for a change in the CEO, an action that would involve risk and discontinuity."

A spokesman for the dissident group did not return a call seeking comment.

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On the Web:

Morgan Stanley: http://www.morganstanley.com

Dissidents' Web site: http://www.futureofms.com