Does the Teladoc-Livongo Deal Make Sense?

It’s the news that shocked the market this week, but is it also an example of just how out of touch Wall Street has been this year?

Aug. 6, 2020

Sure, in the middle of a pandemic it stands to reason that telemedicine would see a boom, which is why Teladoc (NYSE: TDOC) is up 141% YTD as of August 6, and Livongo (NASDAQ: LVGO) is up more than 400%. 

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Before the coronavirus pandemic struck, Teladoc and Livongo were ‘only’ worth a combined value of less than $10 billion. Yesterday, Teladoc acquired Livongo for $18.5 billion. The stunning move will see Teladoc pay $11.33 and exchange 0.592 shares for each share of Livongo, which amounts to a 58% to 42% split in terms of control. Not all investors were pleased with this news though, with Livongo and Teladoc stock prices falling 11.4% and 19% respectively following the announcement.

Does the move make sense?

Aside from Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and other pandemic ‘winners’ this year, telehealth has been one of the biggest growth stories of 2020. Teladoc has seen its visits surge 203% year-on-year in Q2, while Livongo just reported a revenue jump of 121%. 

Jason Gorevic, Teladoc’s current CEO, will remain as head of both companies following the merger, and believes that the coming together of the two companies was an “inevitability”, stating:

“It became very clear that we were either going to team up to create the greatest virtual care platform on the market — or we were going to end up competing with each other.”

The move is definitely a bold one, but it does make sense in relation to user growth for each company. Teladoc has more than 70 million users on its platform in the U.S. who can call doctors and get a checkup from the safety of their homes — like a Zoom (NASDAQ: ZM) for medicine. It now has access to long-term patients which will come back to its service for Livongo’s offerings, giving patients more impetus to re-engage with Teladoc.  

Livongo, on the other hand, leans heavily on health coaches and mainly charges employers and insurers for its help with chronic diseases, weight management, and behavioral health. Now it has the opportunity to bring 70 million clients into its own network. CEO Glen Tullman noted: “One of the really exciting synergies is to go after the 70 million people that Teladoc already has a relationship with, and have our collective doctors now say to people: ‘You’re having this issue? Here — we have a great solution for you.'”

Why are investors upset though?

When scouring Twitter (NYSE: TWTR) for the hashtag ‘#livongo’ or ‘$LVGO’, the negative comments all revolve around the same thing: disappointment at the company for ‘selling out.’ Many investors in Livongo were enjoying massive gains and may have been in it for the long haul, but suddenly, it has essentially been bought out by a larger firm. Technically, it’s a merger but the outcome is much more like an acquisition, with Teladoc maintaining their own CEO and an 8-5 split on board members. 

The combined company will have a multiple of about 19 times revenue based on 2021 estimates, and a value of roughly $38 billion. That’s high relative to where Teladoc has traded historically, and with each stock already inflated thanks to a surge in bullish sentiment this year, many might consider the risks to be much higher now that the companies are combined. 

It’s a sign of the times

One quote from Jake Dollarhide, CEO of Longbow Asset Management sums this up perfectly: “Stock prices have gotten so high with these tech companies and Covid-19 plays that they’re going to use their stock as currency to make acquisitions like this.”

Personally, I think that this merger will work out, and with two of the top telehealth stocks in the U.S. right now combined, it bodes well for investors who now have a far more diversified and wealthier stock in their portfolio.

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