Armed with much more funding and new powers under the Sarbanes-Oxley Act, the Securities and Exchange Commission is certainly unafraid to give CEOs sleepless nights. In fact, many corporate governance pundits have predicted that more and more public companies will decide to opt out of the public markets and go private.
Well, that trend got a big boost yesterday, when Cox Enterprisesannounced it would buy out shareholders of its majority-owned Cox Communications (NYSE:COX) in a $7.9 billion deal. Given the fact that two sisters in the Cox family own a big chunk of the parent company, the decision was probably motivated by the frustration that Wall Street was not giving the company a satisfactory valuation.
Whatever the reason, the impact was significant for the cable industry. Investors are thinking that deal-making may break out, as there was a rally with such issues as Cablevision (NYSE:CVC) and Comcast (NASDAQ:CMCSA).
However, while the stock price of Cox surged 20%, shareholders need to be concerned. There is an inherent conflict of interest with going-private transactions; that is, the current owners -- the sisters -- have the temptation to low-bid the deal. By purchasing at a low price, it means hefty cash flows in the future, as well as the potential for a higher return if Cox Communications goes public again or sells to another company.
True, other companies are free to make bids for Cox. However, this is unlikely, given the fact that the Cox sisters own a majority of the stock.
Yet, in a going-private transaction, the bid is usually sweetened to get the deal done. In the case of Cox, the company has established a special board committee to evaluate the buyout proposal. And, in the current environment of strict corporate governance, it would not be surprising to see the current bid sweetened.
Fool contributor Tom Taulli is the author of The EDGAR Online Guide to Decoding Financial Statements . He does not own shares in any of the stocks mentioned.
