Lehman Brothers Holdings Inc., the No. 2 adviser for U.S. mergers and acquisitions, reported a 47 percent increase in second-quarter profit, led by gains in stock trading and arranging takeovers.

Net income rose to $1 billion, or $1.69 a share, the second-highest in Lehman's history, from $683 million, or $1.13, a year earlier. Analysts forecast earnings of $943 million, or $1.61, according to a survey by Thomson Financial.

Fees from takeovers more than doubled and equity sales and trading revenue gained 85 percent as Chief Executive Officer Richard Fuld expanded beyond Lehman's traditional strength in fixed income. Lehman shares fell the most in six weeks as investors grew concerned that tumbling stock markets will hurt the firm's profit.

``If there were continued pressures because of market sentiment, there's certainly a possibility that some transactions could be deferred,'' Chief Administrative Officer David Goldfarb said, discussing the outlook for equity underwriting on a conference call with analysts. ``We have not seen a drop-off yet.''

Lehman shares fell $3.06, or 4.7 percent, to $62.55 in 11:04 a.m. composite trading on the New York Stock Exchange. The shares have fallen 2.3 percent this year, the worst performance among the biggest U.S. securities firms.

Today's drop led a decline in Wall Street stocks. Goldman Sachs Group Inc. and Bear Stearns Cos., which both report earnings this week, slumped as much as 2.9 percent. Merrill Lynch & Co. fell by a similar margin. Morgan Stanley dropped as much as 2.2 percent. All four firms are based in New York.

`Weak Spot'

Lehman's revenue rose 35 percent to $4.41 billion, the fastest increase in three quarters. Return on equity, a measure of how effectively the firm reinvests earnings, was 23.7 percent, down from 26.7 percent in the first quarter, New York- based Lehman said today in a statement.

While equity sales and trading revenue surged to $878 million, Credit Suisse analyst Susan Roth Katzke said the 7 percent decline from the first quarter was a ``weak spot'' and may be the result of stock-market declines in May. Investment- banking revenue, at $741 million, missed her forecast as debt underwriting dropped 30 percent from the first quarter.

In fixed-income sales and trading, revenue rose 25 percent from a year earlier to $2.2 billion. Revenue from mortgage sales, trading and securitization is still down from a year earlier, Goldfarb said.

As fixed income slows, gains in equity trading and underwriting are ``very important for the future earnings growth of Lehman,'' said Brad Hintz, a former Lehman chief financial officer who's now an analyst at Sanford C. Bernstein & Co. in New York.

Worldwide Stock Decline

The MSCI World Index of stocks has dropped almost 9 percent since May 9.

Lehman advised on $73.2 billion of corporate takeovers completed in the fiscal second quarter, up almost 50 percent from a year ago, according to data compiled by Bloomberg. Fees from merger transactions rose to $244 million from $97 million.

The investment-management division posted a 25 percent increase in revenue to $592 million.

``This was perhaps the most predictable quarter from Lehman in several periods,'' David Trone, an analyst at Fox-Pitt Kelton Inc. in New York, said in a note to investors.

Lehman, the No. 4 U.S. securities firm by market value, is the first of Wall Street's largest companies to post second- quarter earnings. New York-based Goldman, the industry's biggest firm, probably will report tomorrow that net income rose to $1.84 billion for the three months ended May 31 from $865 million in the same quarter last year, according to the average estimate of 13 analysts surveyed by Thomson.

`Successful Effort'

Lehman was founded in 1850 and sold to American Express Co. in 1984. A decade later, American Express spun off Lehman by selling shares to the public. Fuld, who opposed the firm's sale to American Express, emerged as its leader.

Fuld, 60, tripled the firm's share of M&A in the past five years. He also made acquisitions such as buying Neuberger Berman Inc. in 2003 for $3.2 billion to increase revenue from managing money for clients.

``They're making a very strong and successful effort to expand beyond fixed income, and profits are certainly coming in thanks to that,'' said Phillip Titzer, an analyst at Edgar Lomax Co., which oversees $1.5 billion and holds Lehman shares.

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To contact the reporter on this story:
Yalman Onaran in New York at  yonaran@bloomberg.net.

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