Will it actually happen?
As expected everyone in the mainstream media sees the Livongo/Teladoc merger as a watershed event for digital health. Ironically the Street wasn’t that impressed as Livongo shares fell by over 11% while Teladoc shares fell over 19%.
The real question we have is will these two companies actually consummate this marriage or will one of the nuptials get cold feet at the alter? According to everything we have read the deal is supposed to close sometime in the fourth quarter which means there is plenty of time for a change of heart. Given the amount of money at stake here, remember this deal values Livongo at a whopping $18.5 BILLION, it would not be a major surprise if Teladoc had second thoughts.
As we noted on Wednesday this is a COVID driven deal with Teladoc only paying $11.44 in cash for each Livongo share. The majority of the purchase uses Teladoc stock with Livongo shareholders receiving 0.5920 of Teladoc for each Livongo share. Therefore the real value of this deal really won’t be known until it actually closes, assuming it does close.
One reason we kept stating that this was a race for Livongo is that the issues we have noted wouldn’t show up until later this year or early next year. Given the public comments made by the company we knew the first and second quarters would be ok. However we also knew that competition was increasing, 100% at risk contracting was coming which would only drive the fees charged by Livongo DOWN not up. Simply put the “growth” seen so far would slow dramatically.
Do we blame Teladoc for doing the deal? Not at all. Strategically there is a fit here, but this fit is coming with a very hefty price tag and lots of shareholder dilution. This huge price tag combined with Livongo’s interesting accounting methods may create second thoughts given there are much cheaper options available. Options that do not come with creative accounting. Options which generate real money coming in the door, not maybe money coming in the door based on fuzzy math.
Let’s face it Livongo did an outstanding job of creating the impression that have something way cool whiz bang that no one else had, when in reality all they have is old fashioned disease management in a shiny new box. Nothing they have is unique, all of it can be easily replicated and even worse for a company that claims to be so whiz-bang way cool it’s not even using the latest technology.
Being the smart people they are they knew all this which is why they had to find a buyer before this house of cards collapsed. They knew sell now or risk seeing this COVID driven rise their share price evaporate faster than water in the Mojave Desert. They knew that one day COVID will go away and it’s debatable whether the changes we’ve seen with COVID will remain. Some will, some will not.
Yet one thing that won’t change COVID or no COVID is competition in this space will not increase prices, delivering actual verifiable improvements in patient outcomes which produce real savings in healthcare costs will matter. This was and will continue to be Livongo’s Achilles heel. Something that would have become obvious the longer Livongo remained an independent company.
Frankly we thought Livongo rather than sell would actually use their inflated share price and do a deal of their own. The fact that this didn’t happen tells us two things. First these guys are not stupid as they knew possible acquisition targets even a bolt on acquisition were getting a little pricey. Second this perception that a deal was coming made Livongo more attractive as anyone looking at the company had to worry just how high Livongo shares would fly. The rumor mill was churning big time, shares only seemed to go up and it seemed each day the company was being touted as the end all be all. Heck they even got Cramer into the act.
Seriously when it comes to chutzpah Livongo is alone on the podium and boy they didn’t miss a beat. When it came to shameless self-promotion, turning sand into gold and making elephants fly Livongo stands not just on the top of the podium but owns the damn thing. Until this deal came along we thought the late Al Mann was the greatest salesmen in diabetes, but Al is now joined by Livongo CEO Glen Tullman.
