Following up on the Equifax thread.

We had an interesting exchange in the comment section for our recent Equifax post. For a quick recap: the original post argued that the stated growth goals of the company, if taken seriously, would require either considerable risk or improper use of the sensitive data the credit bureaus are allowed unique access to. Either way, this would be in violation of the implicit agreement we made with the credit bureaus allowing them their special status.

Here was the statement from the CEO:

RICHARD SMITH: Our goal financially in the next five years or so is to go from about $4 billion of revenue to $8 billion, from a valuation of $20 billion to $40 billion.

The comment thread mainly revolved around the question of whether or not a company in general and Equifax in particular could seriously pursue that growth target without taking unfair advantage of our data or experiencing a level of risk unacceptable for what is in effect a public utility. Here, slightly rewritten, is the gist of my reply.

We've come to accept, as a society, the notion that growth is something that is simply willed into existence. Rather than being the result of market conditions, technological developments, business logic, and trade-offs between growth/risk/opportunity cost, doubling the size of a company is something a visionary CEO simply decides to do.

We've written before about the growth fetish, an attitude common among investors and business writers that overstates the potential returns of growth while understating the risks. The tetish, as a consequence, demonizes stability. There are few pieces of bullshit conventional wisdom about business more common or pernicious than "grow or die." Lots of businesses have done very well making a steady, stable profit while many others have gone under due to badly conceived plans for expansion.

Almost by definition, accelerating growth entails risk. That said, the dangers associated with growth and the reasonableness of highly aggressive targets vary greatly from one situation to another. It is only when you consider the conditions, that the full absurdity of Richard Smith's proposal becomes evident.

The larger the company, the more difficult high growth rate becomes. The most famous exception to this (GE) was largely the result of risky behavior and accounting fraud. Because of the denominator, it is extraordinarily difficult for a few new products or services (such as evaluating online advertisers) to move the needle. This is a case where $100 million cash cow is literally too small to make a difference. Explosive growth for large corporations is especially difficult when you have mature companies or stable industries or saturated markets. (Or in this case, all three.)

Acquisitions are never risk-free, but some are safer than others. Buying up smaller competitors might be the safest. The riskiest acquisitions are outside of the industry (like a bank buying a cell phone company). Equifax acquiring any large company in the financial services industry would be an antitrust/conflict of interest/regulatory nightmare. Expanding into an overseas market would be extraordinarily problematic (most countries wouldn't even allow a homegrown Equifax to exist). Pretty much the only acquisitions the company could make are in areas where it doesn't know what it's doing.

Equifax actually had a respectable growth rate going into this, having doubled its revenue over the past decade (though that doesn't factor in inflation). As mentioned elsewhere, a great deal of this growth came from questionable newer practices such as employers looking up credit histories for prospective candidates (not sure how much more they can grow with that one). Still, even if that growth rate leveled off, the company would still be in an excellent position, bringing in high profits in an expanding and extremely safe market niche protected from new competitors by what is very close to a government monopoly. The fact that the CEO felt the need to promise to double that growth rate and the fact that people tended to believe him tells us a great deal about investor mentality in 2017.