On Wednesday, Aug 4th, 2020, Teladoc (NYSE: TDOC) and Livongo (NYSE: LVGO) agreed to an $18.5 billion merger, creating a $38 billion combined entity. The two digital health giants have been talking about a partnership for years. However, the idea was accelerated three months ago. Although getting such a major M&A transaction done during a pandemic was viewed to be a major logistical challenge, both companies believed now is the right time for consolidation.
Why Teladoc- Livongo? There are quite a few telehealth giants in the market such as AMwell and MDlive. However, the executives at Teladoc chose a partnership with Livongo for many reasons.
Teladoc, the multi-billion-dollar market leader in telemedicine, provides virtual healthcare services on a business-to-business basis in the United States and internationally. Its market value has increased tenfold to $17 billion based on growth prospects, given that the company has not turn financial positive yet. Its stock has soared since early this year due to the COVID-19 explosion. It now 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. With the fast expansion, Teladoc now is seeking what Livongo offers – chronic disease care. The combination of two firms will allow Teladoc to create continuity with patients for the long-term. It will be a strong differentiator from the market and a key strategy to maximize retention rates.
Livongo, which went public last year, leans heavily on health coaches, and mainly charges employers and insurers for its help with chronic diseases, weight management, and behavioral health. Prior to the merger, it had more than 410,000 members enrolled and over 700 million data points on its platform. It is considered the market-leader amongst companies providing remote monitoring solutions driven through employer and payer distribution. The merger allows it to bring 70 million patients in. Livongo is also hoping to expand to point of care, making the patient the ultimate winner through the merger.
Now we understand the motivations from both companies. But does it really create synergies in the long run? Teladoc’s CEO, Jason Nathanial Gorevic, stated “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.” There will be only one headquarter based in Purchase, NY going forward. The revenue synergy is the main reason behind the merger. The major cost synergy includes sharing of operating costs, such as sales and marketing, general and administration expenses, real estate, and utilities. The combined company is estimated to have $1.3 billion in revenue and more than $120 million in adjusted EBITA, a multiple of about 19 times revenue based on 2021 forecasts, and a value of roughly $38 billion.
Let’s take a look at the market reaction. Behind the 18.5 billion deal, Teladoc paid $11.33 and exchanged shares with Livongo at a 0.592:1 ratio leading to a 58% to 42% split in terms of ownership. However, not all stakeholders were positive. By the close of the deal, Teladoc’s stock went down 19% and Livongo’s stock went down 11.4%. Livongo’s Investors were enjoying massive gains started early this year and were disappointed at the company selling out. The merger announcement has been viewed more like an acquisition based on the exchange ratio and board member split. In some ways, Livongo investors feel the acquisition was premature because Livongo had clear market leadership in the employer and health plan market.
In my opinion, the acquisition is surprising but expected. Healthcare tech companies, such as Teladoc, have benefited from COVID-19 since the beginning of the year. They were expected to use their stocks as currency to make large acquisitions like this. Investors will eventually adjust their view on the change because they now have a more diversified and wealthier stock in their portfolio.
In terms of how this merger will affect early investments in the space, more funds will focus on and invest in digital health. As a result, there will be more capital invested in this sector. Telehealth software companies, such as MicMD, can capture the opportunity to work with B2C digital health companies to provide its own cutting-edge technology. An example would be MicMD provides an integrated suite of technology, software, and purpose, build devices for the combination of the two entities. This will reach the ultimate cost synergy while increasing the number of patients that can be treated. Contact us for more details.
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