Morgan Stanley Inc., the second-biggest investment house on Wall Street, said Tuesday that it would shed its Discover credit card business.
Speculation has swirled for years that Morgan Stanley would split off the No. 4 credit card brand to focus on its prime investment banking, brokerage and trading operations.
Shareholders have urged Morgan Stanley to unload Discover because it has steadily been losing ground in a crowded field of larger competitors.
Morgan Stanley -- which also reported Tuesday that its full-year profit rose 51% to $7.45 billion in 2006 -- said it would spin off Discover sometime next year. The transaction will be as a 100% tax-free dividend to shareholders, with no ownership retained by Morgan Stanley. The company said Discover has about $5.2 billion in equity.
The move comes as rival Visa International plans to go public in 2007, following in the footsteps of Mastercard Inc.'s banner listing earlier this year.
"When I came back here, the firm was in turmoil and this was one of our best businesses at the time," Chairman and Chief Executive John Mack said.
"With the performance we've seen in our other businesses, and the firm having momentum, Morgan Stanley and Discover can go their own paths and create more value for shareholders," Mack said.
Morgan Stanley Chief Financial Officer David Sidwell said the outlook for Discover was bright. The announcement of the spinoff comes at a time when credit card companies are white hot -- Bank of America Corp. this year acquired MBNA Corp. for $35 billion, and shares of Mastercard have doubled since their May 2006 debut.
"Overall, Discover had a great year," he said. "This enabled us to make the announcement that we are spinning off Discover. We think it is well positioned to be a strong, stable stand-alone company."
Discover's fourth-quarter profit more than tripled to $199 million. By comparison, Morgan Stanley's retail brokerage profit rose to $171 million from $84 million last year.
And the company expects further potential for expansion in the business.
A landmark Supreme Court ruling upheld an antitrust suit against Visa and Mastercard that allows all retail banks to issue competing cards from Discover and American Express Co.
On a continuing operations basis, Morgan Stanley reported a fourth-quarter profit of $2.21 billion, or $2.08 a share, up from $1.75 billion, or $1.64, a year earlier.
Revenue rose 24% to $8.62 billion from $6.96 billion a year earlier. Analysts expected earnings of $1.77 a share on $8.3 billion in revenue.
Shares of Morgan Stanley rose $1.33 to $81.70.