The Purple Unicorn

The Purple Unicorn

One of the greatest things about being a grandfather is watching the eyes of your grandchildren light up when you tell them a bedtime story. Now some grandparents like the classics while others realizing that these kids have no clue what’s real and what’s not use their vivid imagination and invent stories. Momma Kliff used to extoll her grandchildren with stories of the purple unicorn, a mythical beast that roamed the forest with magical powers. The purple unicorn using her magical powers had the ability to turn dirt into gold.

Well grandparents aren’t the only ones who like to make up stories as this ability extends to stock analysts and prognosticators. These so-called professionals just love to make up stories about their pet projects. Yes just as Momma Kliff had her purple unicorn, these folks have their purple unicorn with the Teladoc Livongo merger. The $18.5 BILLION merger.

Now anyone who has followed these two stocks since the merger was announced might get a bad case of whiplash. At first it seemed like the Street hated the deal as these two stocks which before the deal was announced seemed to go nowhere but up all of sudden headed nowhere but south. Recently shares have bounced around as no one really knows just what to make of this $18.5 BILLION merger.

Does this deal create a digital health giant as extolled by Credit Suisse when they upgraded shares of Teladoc?

Is it as Cramer said; “It’s coming back. You know, it shook out a lot of people. I think that Teladoc-Livongo [merger] has created the powerhouse in the [telemedcine space]. It’s a must-buy, actually.”

Or is it as we have said a good idea on paper one but a costly deal for Teladoc and their shareholders who are about to experience a major dilution.

The fact is no one really knows as we have never seen something like this before. In some respects this deal reminds of us deals done before the internet bubble burst, when companies were paying huge sums for companies that had little or no revenue. In retrospect some of these deals now look like great while others not so great. The commonality between now and then is only time whose right.

Since we believe in pesky facts here is what do know:

1. This is a COVID driven deal using inflated shares prices as currency. Keep in mind that Teladoc is only paying slightly over $11 per share in cash for each Livongo share. The remainder of the deal is done using Teladoc stock which as we keep noting is about to experience a major dilution.

2. Livongo does make some money but no one really knows what’s real and what’s imagined. While the street as always is fascinated with way cool and whiz bang we on the other hand look at mundane and dull items like whether the Livongo accounting methods are just one big WAG.

3. COVID is here today but hopefully will be gone soon and no one knows what the post-COVID world will look like. What we do know is eventually at some point this company has to make real money and lots of it to justify its $18.5 Billion price tag.

As we have noted in previous posts whenever we see analysts and prognosticators going to extraordinary lengths to explain such a huge price tag it makes us pause and believe this deal doesn’t pass the smell test. It smells all right but not like a great red wine but more like very cheap champagne.

This deal also brings back memories of another way cool whiz bang company that was supposed to revolutionize healthcare. A company which had a huge valuation and everyone and we do mean everyone singing its praises. Just as Glen Tullman the Livongo has never meet a TV appearance he didn’t like the CEO of this company had a fondness for TV. Just as Glen is being hailed as visionary today, this CEO was seen as another Steve Jobs the legendary founder of Apple.

It’s quite possible and even likely that you remember this purple unicorn, a company that collapsed, is now under criminal investigation and the subject of an excellent book. That purple unicorn was known as Theranos.