Thomas Weisel Buyout Only Helps Bullish Case for Goldman Sachs Stock

Yesterday Stifel Financial (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 (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 (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.

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

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4 Thoughts on “Thomas Weisel Buyout Only Helps Bullish Case for Goldman Sachs Stock

  1. peridotic on April 28, 2010 at 3:57 PM said:

    Hey I was wondering after the Goldman trial is over will there still be a drop if they pay a fine or do you think the market has it priced.

  2. Chad Brand on April 28, 2010 at 4:06 PM said:

    I would not expect a huge drop from here (the 150’s) unless the trial result is VERY unexpected. A large fine is probably priced in right now, so it would have to be enormous (more than the $1 billion value of the CDO) and/or come with other concessions to really impact the stock long term. As long as any negative consequences/rulings are one-time in nature and not overly debilitating financially, I think the $30 per share drop we have already seen (from the 180’s to the 150’s) largely reflects the legal risks.

  3. Peridotic on April 29, 2010 at 4:41 PM said:

    Thank you for your response, that was a similar feeling I had. Kind of kicking myself not buying some shares at the $150’s. Still what about the financial bill that could possibly hinder the prop trading?

  4. Chad Brand on April 30, 2010 at 8:26 AM said:

    I don’t think the bill is going to hinder them too much. Most of the issues are around disclosure to clients and how their trades may not always jive with their clients. Clients, though, understand this (even if Congress doesn’t) which is why Goldman is being sued by the SEC while their clients continue to do business with them as normal.

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