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Bear Rallies on Mediocre Numbers; Lehman Posts Solid Results

Earnings beat lowered guidance.

Lehman Brothers



Bear Stearns


Thursday delivered mixed fourth-quarter results as both major brokerages grappled with a tough trading environment.

Bear Stearns watched profits fall 6% as slower trading activity and a dearth of stock and bond offerings dented investment banking fees. Meanwhile, Lehman boasted a 33% spike in profits as its broad mix of businesses helped it shake off weakness in equity underwriting. Both companies' numbers beat recently lowered consensus estimates, boosting their shares as

rate-cut enthusiasm carried over from Wednesday. Bear Stearns rose $1.56 to $55.50, while Lehman Brothers added 56 cents to $76.59.


Lehman posted earnings of $1.46 a share, beating the 11-analyst estimate of $1.26, according to

First Call/Thomson Financial

. Reflecting analysts' weak expectations for brokerage houses this quarter, the consensus had dropped from $1.40 at the beginning of the quarter.

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The biggest lift to Lehman's bottom line came from merger-and-acquisitions advisory fees, which popped 88% to $243 million in the latest quarter. Involvement in large deals such as



acquisition of

Alteon WebSystems

helped fuel the gain. Debt underwriting rose a smaller, though respectable, $25 million.

The noticeable soft spot was in equity underwriting fees, which slipped 13% to $135 million from $155 million year ago. Recent data from

CommScan Equidesk

showed that Lehman dropped to ninth overall from a sixth place ranking in IPO underwriting last year, with the dollar amount sliding to $2.6 billion in 2000 from $3.3 billion in the prior year.

Lehman also posted a notable gain in revenue from its fixed-income business, up nearly 30% to $657 million. In a conference call with investors, a Lehman spokesman chalked the gain up to the "breadth and depth of our fixed income franchise," including plain vanilla businesses such as mortgage as well as "the structured side of the interest rate business," which involves more complicated debt products.


Like Lehman, Bear Stearns also benefited from a jump in M&A advisory fees, though that gain wasn't enough to pull its investment banking business into the green for the quarter. Revenue from that business sank 25%, to $229 million from $307 million in the year-ago period, a decline the company blamed on a "difficult fixed income underwriting environment and a deteriorating equity underwriting market late in the fourth quarter." The numbers would have looked even worse without the advisory fees. "The primary reason for investment banking revenues holding up relatively well is a lot of M&A activity closing in this quarter," CFO Sam Molinaro said in a conference call. "It offset a great deal of the softness in underwriting activity."

Amid all the optimism about Bear beating estimates, investors might want to keep in mind that the expectation was lowered from a consensus of $1.32 at the start of the quarter to $1.11. The company posted earnings of $1.36 on total net income of $195.2 million, down from $207.5 million in 1999. Adding to the weakness were increased compensation costs and a decline in wealth management revenue, which fell 8.9% in the fourth quarter.