Livongo purchased by Teledoc

Investment Analysis Clubs Saul’s Investing Discussions
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Virtual care company Teladoc to buy Livongo in $18.5 bln deal
6:34am ET, 08/05/2020 - Reuters
Aug 5 - Teladoc Health said on Wednesday it would buy Livongo Health Inc in a deal valued at $18.5 billion, in a bid to create a leader in virtual care.

Under the terms of the cash-and-stock deal, Livongo shares are valued at $158.98, a 10% premium to their closing price on Tuesday

Okay, if Livongo REALLY thought that they were wide open to grow forever, WHY, OH WHY would they sell at a 10% premium if they were growing at 125%?

It makes no sense, except that I have kept saying all along that there are a very limited number of medical conditions that can be followed remotely by little devices, which is why I sold out each time. They must have seen the handwriting on the wall.

Best,

Saul

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Okay, if Livongo REALLY thought that they were wide open to grow forever, WHY, OH WHY would they sell at a 10% premium if they were growing at 125%?

After all, they might have risen 10% today (at least) on the basis of that earnings report.

A possible hypothetical explanation: while they may have only 3%(?) of all the diabetes patients, they may already have 40% or 50%(?) of all the large insurance companies (which is their real market). Doubling again may have been impossible, much less continuing to grow at a rapid rate for years. They could have seen stagnation and a receding price, which prompted them to take the current price as their top. (Maybe I’m being harsh on them, but how else can I explain a company growing at 125% that sells out at 10% over their stock price).

Saul

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Hi Saul,

On another thread on our board https://discussion.fool.com/captain-not-sure-how-you-calculated-… Mark calculates a 31% premium. It looks right to me but I’m not sure.
John

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Captain,

Not sure how you calculated 10%. As of yesterday’s close LVGO’s market cap was ~14.1B. The deal is valued at 18.5B. I’m getting around a 31% premium over yesterday’s close. Am I looking at this wrong? 31% is not great but much better than 10%.

Long both TDOC and LVGO.

Thanks,
Mark

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Denny replies here as to why he thinks it is only 10%

I’ll leave it to sharper minds.
John

https://discussion.fool.com/not-sure-how-you-calculated-10-did-y…

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Saul and others:
I apologize if this is slightly OT for the board, but Livongo is my largest holding at the moment and I’ve never experienced a merger in my portfolio before.

I have already decided that I don’t want to stay invested in Teladoc post-merger. I have other, higher-confidence SaaS companies that I will add to.
In your experience, is it better to sell before or after these types of stock+cash mergers?
I suppose we have a price target now (0.592x TDOC price + $11.33), and I should sell as long as Livongo stock price is above that target price?

Any advice is appreciated.

Thanks,
MVR

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I have a reasonable explanation for this that doesn’t involve doom and gloom. However, the inner workings of business deals are absolutely not things I know anything about, so perhaps someone in the know can correct me where I’m wrong, or confirm if I might be on the right track.

Financial deals take time. They’re messy. Heck, when I bought my house over a decade ago, and when I re-financed 3 years later (pre-Rocket Mortgage), there was a lot of paperwork involved, and multiple visits to go over and sign documents. And that’s just a house. I can’t even imagine what’s involved to acquire a company.

How long does that take? One month? Two months? At what point does the selling price get set in stone? (Asking because I really have no idea.)

LVGO was $77 a month ago. It was $57 two months ago. Maybe the deal was made with the LVGO folks not thinking that they’d be getting not a 10% mark-up in share price, but a 100%+ mark-up? Perhaps some of the run-up in price over the last month is due to knowledge of this deal leaking? Or it’s unrelated, but bad luck for LVGO, in hindsight.

Of course, you can argue such a merger is smart, due to LVGO’s 100% YoY growth. But even if it’s not optimal, there are explanations for why they might want to, assuming they thought they’re getting a ~100% mark-up. It’s like why people take the lump sum after winning the lottery. Or maybe they think that together, they’ll be able to build the most dominant largest telehealth player in the country together.

I also have mixed feelings about this, and am not sure how much of my LVGO (4th largest position at 12%) I’ll keep. But here’s what I know for sure: I’m going to wait to see what Bert says about this. These kind of things make the price of his TickerTarget newsletter more than worth it.

Matt

P.S.: Portfolio management (should I sell before or after the merger) are OT!!! So are questions about what happens to your shares. Please don’t ask any others, and if you reply to them, do so off-board. Thank you!

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We are in the crazy-times.

Wait a little to see what develops. Or “Bolt.” it is your choice. Thoughts:

The downside is if the market hates this deal and crushes TDOC, crushing the exchange value for LVGO… but if anything, Saul’s question seems most relevant “Why sell a company increasing revs at 125% YoY for a 10% premium?”

Either the market will think TDOC is genius or the market will think LVGO management sold for a Reason.

They could have been working this deal for 6 weeks, after agreeing to a range of values for their companies, and LVGO just kept rising out of the range this past month. Tullman may have zero experience with managing a high growth company and the stock market behaviors and expectations for such. Maybe he underestimated Livongo’s premium valuation potential? Certainly could have floated convertible bonds to raise a giant bunch of cash at Livongo, if they wanted…

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I don’t know if insiders own enough shares to push this deal through, but I can’t see why minority shareholders would approve of this deal. The supposed (low) 10% premium is now almost zero based on pre-market prices. Extremely puzzling and frustrating deal for a LVGO shareholder.

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No. of Recommendations: 0
I don’t know if insiders own enough shares to push this deal through, but I can’t see why minority shareholders would approve of this deal. The supposed (low) 10% premium is now almost zero based on pre-market prices. Extremely puzzling and frustrating deal for a LVGO shareholder.

The boards represent the shareholders, both have already approved the deal. I don’t think it can go to a vote unless somebody else where to try to offer a better deal which would make the board have to reconsider. One month or two months ago, there wouldn’t be much of a complaint.

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The deal is still subject to shareholder approval.

Alex

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Okay, if Livongo REALLY thought that they were wide open to grow forever, WHY, OH WHY would they sell at a 10% premium if they were growing at 125%?

Does the fact that they’re merging with a company growing 85% (and getting shares in that company) make a difference?

Also, they’ve nearly doubled in just a month when they pre-announced earnings. I know they also did that in the previous quarter, but maybe that was a way for them to prove their value while the talks were ongoing?

I’m not a fan of the deal, as I never loved the business model of TDOC.

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Jeeeez. I’m baffled as to why Livongo would sell themselves for nearly no premium after accelerating revenue growth again (125% is crazy!)

On their conference calls, management has always stated they have great visibility into future revenue, which has always been recurring, and very high margin. This deal may suggest that the revenue growth was to very quickly disappear. I’m really not sure how else to read this and not react this way.

Matt

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Okay, if Livongo REALLY thought that they were wide open to grow forever, WHY, OH WHY would they sell at a 10% premium if they were growing at 125%?

Point taken. However, I think LVGO shareholders will retain 48% or so of the new company so they are still in the game. Moreover TDOC has been growing very well. I’m not sure of the growth rate but its up there.

Their thinking seems to be that the combination of the two creates something stronger still in an area and market that is rapidly expanding.

This could very well be a combination that strengthens current growth prospects and cements the position of the new leading company in its ability to deliver two important types of service.

Also, given what others on this board have reported concerning T2D diabetes it seems there is quite a way to go before growth of LVGO market share there begins to abate, leaving aside the question of whether other diseases are susceptible of the same AI approach.

cheers

draj.

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No. of Recommendations: 1
Jeeeez. I’m baffled as to why Livongo would sell themselves for nearly no premium after accelerating revenue growth again (125% is crazy!)

On their conference calls, management has always stated they have great visibility into future revenue, which has always been recurring, and very high margin. This deal may suggest that the revenue growth was to very quickly disappear. I’m really not sure how else to read this and not react this way.

I can’t say if 10% premium is acceptable now but 1 or 2 months ago (or even couple of weeks ago), this valuation would have looked very attractive.

All my speculation but I wouldn’t be surprised that one reason LVGO has been on a tear lately was due to the merger talks happening over the last few months. If they had pulled out all of a sudden on the Low premium without it ever being made public, I wouldn’t be surprised that the price would drop as well. The IR dept wouldn’t have an explanation for the rapid increase or drop since non of it is public news.

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Saul,
How are you coming up with 10%. I have it at 30%. They are being valued at 18.5 billion so that would give them a share price of $193. $149-$193 = -$44. $-44 / $149 = .29530 that is with a share count of 95.543 million.

Andy

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I don’t think it does any good to discuss valuations when we are dealing with a moving target. A few moments ago I calculate LVGO to be worth 133 approx. When the market opened it was 158. The two companies are tied together now and it will take days to sort out some sort of valuation, but clearly the market doesn’t like the deal. OT but I sold covered calls on my entire LVGO position two days ago for a 20 dollar premium. Jan 2021 calls. So I have that little kicker to help, plus the huge run up in LVGO price this year.
Mike

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Hi Saul,
Ok now I understand where you are coming from. The problem with all of this is how much is TDOC shares going to be worth when it closes.

The more I see this merger the more I am starting to like it. We have LVGO growing at 125% with 410000 customers and TDOC growing at 80 percent with 51.5 million customers. Both of these merging together. This is going to make them a juggernaut and propel them above all competition instead of slugging it out. I bought more shares and can’t wait to see where this company is in another year or two.

Andy

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Doesn’t this deal give the big investors in LVGO control of TDOC? Or am I misunderstanding this? Tullman should now have a large amount of shares of TDOC, more than the TDOC board? I haven’t looked into the numbers… but I remember LVGO insiders held a large chunk of the company. Just something to throw out.

Seems like an extreme overreaction in both the stocks

bnh91

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this is a surprise… few quick thoughts…

I do not see this negative… it seems lot more positive to me.

remember TDOC also bought InTouch which deals with sensors in healthtech… imagine LVGO is able to offer additional services with InTouch sensors in many more situations…

TDOC’s own organic revenue growth accelerated through this pandemic and jumped above 80%… so it is not a throw-away company to look down upon… in fact, that level of growth belongs to the top tier of stocks favored by this board right alongwith LVGO…

10% premium may just be incidental as both these companies’ stock has been moving a lot in last month… quite possible when they did the deal and set the ratio, the premium looked quite different…
Seeing this 10% as proof of something wrong is just to shallow a look…

I see this deal as creating a behemoth in virtual health sector… which is probably needed and help accelerate both of these companies… .

I am impressed by TDOC CEO Jason Gorevic’s ability to relentlessly work on building TDOC and put together a real force in health care that can deal with entrenched forces like insurers and hospitals… you need a large size to be effective in this business…

wont be surprising to see TDOC coming up with its health insurance in not far future…

Not impossible to see such a company ultimately ends up with Amazon / BirkShire / JPM initiative of creating independent health services…

With LVGO being my largest position and I started buying TDOC after last earning, I may reduce my overall combined position for portfolio management but I intend to hold really large position in merged company… I see it as real answer to many of health care problems in this country and very positive by many angles…

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I had the same reaction as Saul when I woke up to this news. Well my ACTUAL reaction was like, “WHuuuuuuuuuuuuut?”

I Took Action

I just sold my entire position and spread it out most of it equally over CRWD, DDOG, and OKTA and bumped NET a little just to keep it balanced.

Why?

Frankly the valuation of the merger - the math - isn’t interesting to me. I mean TDOC went down 10% more than LVGO already, so inputs are noise today anyway, but it REALLY doesn’t matter to me because I’m not interested in the finances. It is simple: This is a major change to my investment “thesis”. Rarely have I seen such an obvious, massive shift, in one single news release.

  1. What kind of management team gives up on their vision while things are going so well?: Whether they got in bed together or it was a mugging, the result is the same. This “merger” is really TDOC swallowing up LVGO. A mission-oriented management (I assume) is out; either not mentioned in the news I read at all or given a token seat on the board (even if it turns out I am wrong on the details, I don’t think it matters). Livongo was helping people with their sights set on expanding that help to more people. We just learned how successful this mission is unfolding, so…they sell out?!

  2. Too complicated: There are too many meta-business concerns here. It is hard enough to find great companies with a clear mission and business model growing fast. I really don’t want to, or need to, mentally deal with what these outside factors mean to the core business over time. I’m just going to the sidelines…well in this case I’m leaving the game early so I don’t have to fight everyone else to get out of the parking lot.

A note as others have asked: In past acquisitions, the price was set right away. If the deal is upheld, from what I have seen it is rarely worth sticking around for the small change settled by arbitrage unless you want to keep the new shares, I guess.

This is the noise I expect to continue:

  • “synergy” discussions. How long will this take to play out? The businesses and models make more sense separate to me. TDOC WILL figure out how to stitch them together and improve their business, otherwise they will have a lot of angry investors! How do these fit together…?:
  1. A data-driven AI platform to coach people who suffer from extremely complex chronic conditions who win customers by saving them money and win users by providing value.
  2. Teledoc.
    …My best guess is Teledoc wants the data and device/app so if I am a Livongo user I will be able to hit a button to connect with a doctor and ask for help…? A small feature addition. Why not form a partnership and integration. Perhaps TDOC didn’t want it? Regardless the data is the real value. Livongo investors know this was their moat and this “merger” proves it in my mind. The only way to get in to this area was to buy Livongo’s moat and castle together.

BUT… why not do the Buffett-ian thing and keep management doing what they have proven they can do and grow the business. Livongo has powerful relationships with major providers and companies! This would be the other reason to buy Livongo: the customers they won were a major major undertaking. This was the other big part of their moat. Perhaps management weren’t the ones with the connections. Perhaps there was a coup and we’ll see whoever does have these connections in charge next…

…drama in a story can be fun, but not in an investment.

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