updated 4/18/2006 2:43:50 PM ET 2006-04-18T18:43:50

Financial services firm Merrill Lynch & Co. on Tuesday posted sharply lower first-quarter earnings after taking a hefty charge for stock-based compensation, but record revenue from investment activity helped the results beat Wall Street estimates.

For the quarter ended March 31, Merrill’s earnings after preferred dividends fell 64 percent to $432 million, or 44 cents per share, which included a $1.2 billion expense from changing how it accounts for stock options paid as compensation. It earned $1.21 billion, or $1.21 per share, a year ago.

On average, analysts surveyed by Thomson Financial were expecting earnings of 32 cents per share, including the stock-option expense. Merrill initially predicted a $350 million charge, but later said other changes to its compensation plan would increase the expense by $850 million.

Revenue rose to $7.96 billion for the quarter, up 28 percent from $6.23 billion last year amid an industrywide pickup in investment banking activity. Analysts were expecting Merrill to report $7.33 billion in revenue.

Merrill’s better-than-forecast results were the latest in the recent wave of improved performances at the nation’s brokerages, which have benefited from a rebound in global trading and acquisition activity. On Monday, Citigroup Inc. said investment banking strength helped its profit top analyst estimates; Goldman Sachs Group Inc. last month reported a 62 percent jump in quarterly earnings.

Revenue from Merrill’s global markets and investment banking division grew 37 percent to reach $4.55 billion. Upbeat trading of interest rate and credit products lifted debt markets revenue by 26 percent to $2.09 billion, while revenue from equity markets climbed 62 percent to $1.57 billion, the company said.

Like many of its peers, Merrill’s results were also lifted by greater merger and acquisition activity, with investment banking revenue gaining 30 percent to $889 million. Strategic advisory fees gained 61 percent, Merrill said.

Merrill’s private-client business saw revenue increase 13 percent to $2.94 billion, led by a 15 percent jump in fee-based revenue and stronger net interest profit, which gained 31 percent.

The company said revenue at its asset management unit, which is merging with BlackRock Inc., advanced 38 percent to $570 million as net asset inflows swelled to $15.4 billion, its highest level since the second quarter of 2000.

During the first quarter, Merrill agreed to sell Merrill Lynch Investment Managers to investment group BlackRock in exchange for a 49.8 percent equity stake in the combined unit. The deal is expected to close during the third quarter, pending regulatory and shareholder approval.

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