Investment bankers popping the champagne corks already

NEW YORK » Driven by the unprecedented value of takeovers and a roaring stock market, Wall Street's biggest investment houses are set this coming week to report quarterly results that have the potential to leave investors breathless.

The biggest players in investment banking -- with Goldman Sachs Group Inc. leading off Tuesday -- have reaped blockbuster fees in a record year for global merger and acquisition activity. The volume of acquisitions announced in 2006 broke the record set in 2000, with more than $3.46 trillion in deals reached this year.

Wall Street analysts spent the past week raising their earnings projections, telling clients they underestimated the breadth of deals the securities firms would capture. The fourth quarter has seen a total of $908.2 billion of announced deals, beating out last year's $846 billion, according to financial data provider Dealogic.

In this past week alone, Bank of New York Corp. said it would buy rival Mellon Financial Group Inc. for $16.5 billion, and LSI Logic Corp. snapped up rival Agere Systems Inc. for $4 billion.

"The quarter has been phenomenal," said Brad Hintz, a banking analyst with Sanford C. Bernstein & Co. "There won't be a question if things are weakening, but instead it's a matter of how high they will go and by how far brokerages will beat analyst expectations."

Goldman Sachs, Morgan Stanley Inc., Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. have earned a combined $21.3 billion in the first nine months of the year. This surpasses the full-year record of $20.4 billion set in 2005.

The companies are expected to report a combined $128 billion of revenue this year, according to analysts surveyed by Thomson Financial. Bear Stearns and Lehman report Thursday, while Morgan Stanley is scheduled for the following week and Merrill Lynch in January.

Guy Moszkowski, an analyst with Merrill Lynch, on Wednesday readjusted his fourth-quarter projections higher for the group. At the heart of it, he said, is that equity underwriting has surged 61 percent from the third quarter due to strength in the U.S. and international M&A.

He also noted that initial public offering activity has rebounded by about 114 percent from the third quarter. Proprietary trading, which is a brokerage's own money that it uses to invest, also could see record levels during the quarter because of Wall Street's record run.

"Trading fundamentals are generally strong," Moszkowski said. "Equity markets have rebounded solidly this quarter from the weakness we saw this summer."

But, can this continue? That answer might come as chief financial officers at the major brokerages lead analysts through their earnings reports, and answer questions about how they feel 2007 will shape up.

A strong forecast looks likely -- and that signals the good times for individual investors will also continue.

There was a record M&A backlog during the third quarter with deals worth $24.9 billion registered with the Securities and Exchange Commission, according to Dealogic. As of Thursday, there were $19.2 billion of deals on the books -- compared to $20.3 billion a year earlier.

And so long as the pipeline remains rich, and the investment house's themselves don't forecast a slowdown in the markets, then 2007 should be off to a good start. That also means stock prices for the banks themselves -- many of which already trading near yearly highs -- stand to gain.

"History argues that when you look at their earnings, the minute they are produced they become ancient history ... you're looking at 2007," said Richard X. Bove, an analyst with Punk, Ziegel & Co. "Once the earnings come out, you'll see everyone immediately raise their estimates and stock price targets."

He said investors use the investment banks as a gauge of the market itself. Their stock prices will go higher if it appears the economy will continue to roll along, or get slammed if a slowdown is forecast.

And it's not just investors that have a lot riding on what these companies forecast. The big year on Wall Street has already paid off for the executives that lead them.

Lehman Brothers, the fourth-largest U.S. securities firm, said during the week it will pay Chairman and Chief Executive Richard Fuld an extra $186 million during the next 10 years. There has also been talk on Wall Street that 50 executives at Goldman Sachs might receive $25 million each as a bonus, though the company would not comment.

"The fact there's a rumor out there about this shows you what kind of a year it has been," Hintz said.