In the Exqifax Inc. (NYSE:EFX) Scandal, the Customer Knows Last

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Equifax Inc. (NYSE:EFX) was founded in 1899, and by the 1920s it had offices around the country. Its business has not changed. Equifax was a way for stores to pool customer data before extending credit. This has been true since technology meant punch cards, file drawers, typewriters and cash registers.

Equifax EFX stock

Equifax is not now and never has been a technology company. When International Business Machines Corp. (NYSE:IBM) first began selling computers, in the late 1940s, it told big customers like Equifax it would take care of them. Vendors took responsibility for things like security.

The idea of a company acting as a passive customer died a generation ago, as PCs got onto desks. The lack of customer passivity is behind IBM’s own troubles this century. But Equifax is still, fundamentally, doing business the way it did in the 19th century.

This fact is at the heart of the scandal. Even after it broke out, Equifax didn’t know how bad it was, or how to talk about it. 

Equifax was as blind as its customers.

No Such Thing as a Passive Customer

Equifax failed to heed warnings from vendors like Cisco Systems Inc. (NASDAQ:CSCO), which found a flaw in Apache Struts, a popular open source framework used by Equifax. Apache had a fix out by March 6, and code that exploited the flaw was demonstrated on March 9. Equifax now says it found its problem on July 29. (The hackers may have gotten in as early as March.) Equifax should never have let open source in the door if it wasn’t going to take responsibility for it.

Now that this is all public knowledge, most observers continue to talk about Equifax’ former chief information security officer having a music degree. (Don’t laugh. The technology of WiFi was originally based on synchronizing player pianos.)

More important is the action Equifax finally took in response to the scandal. It hired a unit of FireEye Inc. (NASDAQ:FEYE) to do a security audit.  It signed a vendor contract. It acted, still, like a technology customer, not a technology creator.

Meanwhile, an entire transaction processing industry has grown up around Equifax. Many of these companies are bigger than Equifax itself, based just miles from its old Atlanta headquarters, which is now an arts school. 

What Comes Next?

Since Equifax acknowledged the breach, three months after it happened, the company has lost one-third of its value. It will lose more.

Its rivals are TransUnion, now owned by private equity, and Experian plc (OTCQX:EXPGY), originally a U.S. company but now based in Europe. When transaction processor First Data Corp. (NYSE:FDC) found itself bound in technology complexity, over a decade ago, it also went the private equity route, returning to the public markets just two years ago. It still trades at just 1.5 times revenue.

Something like that is in Equifax’ future. The company still has its files and accounts, but the technology platform is a mess, and badly needs an update. This will take years to execute, and public stockholders don’t have patience for it. At its September 18 price of about $95 per share, Equifax was trading at less than four times its annual revenue, and 14 times normal operating cash flow.

A private equity buyer can hire lawyers to deal with the company’s liability, lobbyists to deal with the political fall-out. It can perform a complete clean-out of its technology platform and, perhaps, even get it onto the cloud.

At some point the price of Equifax common will fall below the price a private equity buyer is willing to pay. That’s when you buy, and wait for your white knight.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time,  available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/equifax-customer-knows-last/.

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