Two of the best stocks of 2020 joined forces as Teladoc (Nasdaq: TDOC) bought Livongo Health (Nasdaq: LVGO). Typically after a deal, the acquired stock goes higher, while the acquirer declines modestly. What's unusual is both stocks have declined with both stocks down about 15% since the deal was announced.
Telehealth
Both companies are in the booming, telehealth sector. This area of healthcare was growing rapidly before the coronavirus but has grown exponentially since the pandemic made doctor's offices and waiting rooms a high-risk area for sick people. As a result, both companies experienced huge surges in demand and user growth.
Teladoc's business is to charge a subscription fee to employers and insurance companies so their employees and members can access doctors via telehealth on Teladoc's platform. The setup is cheaper and can lead to better care as patients can quickly reach a doctor without having to take time off from work. Most of Teladoc's doctors are independent contractors. Currently, 70 million people in the US have access to Teladoc, and the company has begun expanding internationally.
Livongo has a similar model to Teladoc but specializes in diabetes management and care. It uses health coaches, glucose monitors, and smart scales, which it manufactures itself. Livongo also charges employers and insurance companies. The company has also been expanding into other chronic diseases like hypertension, weight management, and mental health and is looking to expand into other categories as well.
The upside with the deal for Livongo is that Teladoc's patients can be easily onboarded. For Teladoc, it increases the chances of forming, long-term relationships with patients rather than a more convenient option when someone's primary doctor is unavailable or a convenient appointment can't be made. The combined company is expected to bring in $1.3 billion in revenue next year which would be an 85% increase over this year. Teladoc's CEO, Jason Gorevic, will take over as CEO of the new entity. The transaction will be closed at the end of the year and is expected to get shareholder approval.
Teladoc struck the deal because it wants to get into chronic disease care and management. Gorevic said that after talking to Livongo, it became clear that they were either going to work together or compete against each other.
Stock Price Impact
Teladoc will pay about 0.6 shares of stock and $11 in cash which equated to $18.5 billion at the time of the deal being announced. Since Teladoc's stock price dropped, in effect its bid for Livongo dropped as well. For Livongo, it's about a 60% premium over today's market price. Notably, there's a big gap between Livongo's current market cap of $11 billion and its takeout price.
Teladoc and Livongo have been two of the best-performing stocks over the last couple of years. Since Livongo's IPO in July 2019, the stock is up 320%. It's up nearly 700% since the stock market bottom in March. Teladoc is up 915% since its IPO in June 2015 and 88% higher since the March lows.
The negative reaction may be because Teladoc will have to dilute shares by as much as 60% to finance the deal. Additionally, some investors are skeptical that Livongo is a good fit for Teladoc and maybe a distraction from its core business.