Fools or Visionaries?
Laurence Peter once said; “You can fool some of the people all of the time and all of the people some of the time, but you can make a damn fool of yourself any old time.” Given the reaction to the Livongo Teladoc merger we’re beginning to think Mr. Peter might be right. Reading through the various analysis of the deal this is either the beginning of a revolution or this is yet another example of the greater fool theory.
Not surprisingly those in the digital health space are hailing this deal as proof that digital health is here to stay and will forever change healthcare. On the flipside is the investment community which hates the deal seeing it as the first sign that the digital health bubble is about to burst. It should be noted since the merger was announced shares of Livongo have fallen over 16%, while shares of Teladoc have fallen over 22%, hardly a ringing endorsement.
From the street’s perspective there are two big issues, the price a whopping $18.5 Billion and Teladoc shareholder dilution. Put simply the street believes Teladoc is overpaying.
Since this deal was announced we noted that it was driven not by sound business fundamentals rather by COVID. Take a look at this from January 1 of this year until March 21 (this is the day Chicago went into shelter in place) shares of Livongo were DOWN over 10% while shares in Teladoc were up 100%. From March 21 until August 4 (the day before the deal was announced) shares of Livongo were up over 540% while shares of Teladoc were up almost 43%. To say that COVID set Livongo shares on fire is like saying Chicago had a small fire after Mrs. O’Leary’s cow knocked over the lantern.
Yes there are some synergies here, but the real question is why Livongo and why at this huge valuation. Another interesting question is why now, why do this when shares of Livongo are skyrocketing. Would it not have been better to wait and do this when Livongo shares weren’t hotter than Georgia asphalt? It’s not like anyone else was pursing Livongo. Everyone else saw pretty much what we did, shares were vastly overvalued and likely to come back down in the coming quarters. Listen we don’t blame Livongo for selling but we’d sure like to know what Teladoc was smoking.
Another intriguing question is what does Livongo management know that no one else does? In a great post on the Motley Fool Jeremy Bowman writes;
“Livongo, on the other hand, was posting sterling numbers in an industry it’s essentially pioneered. In the second quarter, revenue jumped 125% to $91.9 million, and it posted an adjusted profit of $12.5 million, up from an adjusted loss of $7.6 million in the year-ago quarter.
That’s not the profile of your usual acquisition target. That Livongo agreed to sell itself means that there’s something management knows that investors don’t — maybe they think the stock is already priced at a substantial premium, or they expect the current growth rate to slow significantly.”
As we have noted since Livongo began its meteoric rise this house of cards would come tumbling down in the not so distant future. That their “interesting” revenue accounting combined with increased competition would catch up with them. All along we have said there were just two options here; either Livongo finds a greater fool or becomes the greatest short of all-time. It was a race against time before the first domino fell and the rest followed.
Additionally we also noted that while Livongo likes to claim what they have is unique and special it’s merely an old idea, disease management with new technology. Livongo’s primary driver is helping patients with diabetes more effectively manage their diabetes. The theory is better management leads to lower healthcare costs. In the old days when disease management was all the rage this was done by calling the patient to make sure they were testing their glucose levels, eating right and taking their meds.
With Livongo the patient was given a cellular enabled glucose monitor which allowed the company to communicate with the patient via text messaging. Rather than logging readings in an old-fashioned logbook, readings were sent to the cloud where data analytics were then applied. Livongo coaches then used this information when communicating with patients. The only real difference from the old disease management days was rather than calling the patient on an old-fashioned land line, their recommendations were sent via text message.
Some will say these recommendations were made with better data as the readings were delivered to the cloud, that assumes of course the patient is actually testing their glucose on a regular basis. Something that does not happen in the real world and this hasn’t changed since we began writing over 20 years ago.
Let’s just assume for a moment that new technology applied to an old idea actually works. Why buy Livongo when there are a plethora of other options available that are much cheaper and come with a large installed user base as a bonus. The most obvious choice would be LifeScan, once part of JNJ then sold to Platinum Equities back in 2018 for $2.1 Billion. Since that time LifeScan has added CGM signing a deal with Sanvita back in 2019 then adding a deal with Noom in May of this year.
Better still LifeScan has a huge installed user base plus all the way cool whiz bang toys that Livongo has. The OneTouch Verio Flex also sends readings to the OneTouch Reveal app. The app will notifies patients about any recurring patterns (e.g., times when blood glucose is too high or too low) so patients know to take action, and it pulls data into 14-, 30-, and 90-day summaries that can be shared with a doctor or diabetes educator. OneTouch Reveal also integrates with the Apple Health app, so patients can track blood glucose, steps, weight, heart rate, and more all in one place.
All that’s needed would be coaches another area where there are a plethora of options. Add an experienced diabetes coaching company such as Cecelia Health to the mix and bang Teladoc has what Livongo has at a much lower cost. Oh and did we mention that LifeScan brings with huge scale, a global presence and brand name recognition. Perhaps we should also mention that besides having like 20x the patients Livongo does, LifeScan has lots of free cash flow somewhere in the $500 million neighborhood, which is a very nice neighborhood.
Now we haven’t spoken to the good people at Platinum, but our guess is they’d be delighted to sell and would not need $18.5 Billion to unload LifeScan. Nor have spoken with the smart folk at Cecelia but our guess is they too would be amendable to being part of this deal. Our guess and it’s just a guess is that the folk at Teladoc once they get off the floor after falling off their barstool, wouldn’t mind spending a fraction of the $18.5 Billion it would have cost them to buy Livongo. That it just might work out better for everyone involved, everyone but Livongo that is, to own LifeScan.
We hear that the CEO’s of Livongo and Teladoc have a history as do other members of the various management teams. If you believe what’s been written it’s one big happy family, a deal made between friends. This would seem to indicate that no matter how much Teladoc overpaid this deal is set in stone. That is until you consider that Teladoc shareholders, those shareholders who have not just seen their stakes become less valuable but are about get diluted big time might just mention to management they aren’t thrilled with paying $18.5 Billion for Livongo. They just might say other cheaper options were available. Options that came with lots of patients, better toys and yep free cash flow which helps pay for the deal.
Last week we mentioned that Livongo CEO Glen Tullman has joined the late Al Mann as one of the greatest salesmen in diabetes history. Again reading about how this deal came together, how Glen and Teladoc CEO Jason Gorevic did their social distanced dance it proves to us that Glen did his best PT Barnum on his newfound friend, or sucker depending on your point of view. To his credit Glen knew that the good times were not going to last forever, that the clock was ticking before the bomb was going to explode and that if he didn’t sell he would have egg on his face rather than a new boat.
So what happens if Teladoc comes to their senses and realizes they are vastly overpaying for Livongo?
1. They could rework the deal which we view as unlikely as this makes them look like idiots for offering $18.5 Billion in the first place. It may be the right thing to do but CEO’s hate to publicly admit they made a mistake.
2. They could walk away, pay the breakup fee and chose the cheaper better option. Jason might breakup some friendships with this wise decision, but he’ll do so knowing that these friends will be well compensated. As Momma Kliff used to say money buys lots of things and its amazing how friends get over a slight when they have millions in their bank accounts.
3. Do nothing and live with this very costly mistake.
Honestly we have no idea what will happen. As we noted when we began this post either this deal is truly visionary or once again proof that the greater fool theory is alive and well. Time will tell for as E. J. Hobsbawn said; “The only thing certain about the future is that it will surprise even those who have seen furthest into it.”