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Yesterday Stifel Financial (NYSE:SF) agreed to acquire investment banking competitor Thomas Weisel Partners (TWPG) for about $7.60 per share in stock, a premium of about 70% for shareholders. This deal got my attention because I have written positively about Goldman Sachs (NYSE:GS) lately and this deal reinforces my view on the undervalued nature of the investment banking sector. As is the case with houses, stock values are largely determined based on what are known as “comps” or comparable sales. You see how much your neighbors’ houses have sold for and use that as a yardstick for valuing your own house, or in this case, your own company.

One of my arguments for liking Goldman Sachs stock is that investment and commercial banks typically fetch between 2 and 3 times book value. The former figure is often used with gross book values, with the latter coming more into play when firms look at net tangible book values. In the 150’s, Goldman Sachs shares are trading at around 1.25 times book value, which to me seems like a very attractive price given their strong global franchise.

Anyway, back to the Stifel/Thomas Weisel deal. Stifel is paying $7.60 per share in stock, which equates to about 1.85 times book value and 2.1 times net tangible assets. Given the economic and political climate, it was not surprising to see this deal get priced at the lower end of the historical range, but I was still very happy to see that the range remained relevant in a deal that actually got done in 2010.

I think it is hard to argue that Thomas Weisel Partners, a small specialized investment banking firm, should fetch more than the leading global franchises such as Goldman Sachs or Morgan Stanley (NYSE:MS). As a result, both of those large cap investment banks look attractive at today’s prices. To reach a price-to-book ratio of 1.85, Goldman Sachs shares would need to rise about 50% from current levels. Morgan Stanley is even cheaper and would need to rise by more than 60% to reach that valuation level. All in all, yesterday’s Thomas Weisel buyout offer only strengthens my bullish convictions on Goldman and it appears that Morgan Stanley fits the same mold as well.

Disclosure: Peridot Capital was long shares of Goldman Sachs at the time of writing, but positions may change at any time

Source: Thomas Weisel Buyout Proves That Investment Banking Sector Is Undervalued