TDOC Bear Thesis + My Reponse

I’m super long TDOC/LVGO and one of the most common bear theses that I’ve read ask why can’t a managed care organization like UNH or an EHR company like Epic bolt on their own offering to sell into their networks? Both as a point of competitive differentiation, to lower premiums paid out to TDOC for insurers, and because it’s a very lucrative, fast-growing space. They are so entrenched in health systems across the country. And in fact, they already are:… and UNH also acquired a number of telehealth and remote-monitoring startups. “Twilio’s cloud-based platform allows Epic clients to perform video visits, access patient history and update clinical documentation within the EHR during a visit.” And they can also acquire a remote monitoring competitor like Omada and have an end-to-end platform, right? People would want to stick with their existing providers.

My answer: Basically, TDOC is like Amazon and Epic is like Shopify. The key difference with healthcare is that the latter can’t share supply and demand between networks. Each hospital system has their own EHR system. TDOC+LVGO covers more conditions than they would, so it’s better for smaller health systems to partner and gets referrals for in-person visits from TDOC’s national network. I think that over time, you’ll be seeing a lot more patients who do most of their visits online, just like online shoppers who buy most of their stuff on Amazon, hence the value of accessing Teladoc’s patient pool keeps increasing. Imagine you’re a small hospital system and you get a surge in telehealth visits. You don’t have the staff to perform on-demand consultations while TDOC can leverage a physician halfway across the country who is online. Also, not all hospitals use Epic and not everyone is covered under Epic so their patient and provider pool are inherently limited. This is especially true for multinational organizations who want to buy one digital health service across their global operations, TDOC already is in 175 countries.

Smaller EHR companies probably don’t have the resources to build the same end-to-end platform and would be better off partnering with TDOC just like smaller businesses that don’t have a very recognizable brand would be better off selling on Amazon. EHR systems are notoriously hard to work with and they were not designed to enable real-time, point-of-care clinical decision support and analysis from a range of sources; to do so, health systems must integrate the EHR with many other digital resources which is challenging.….

Hospitals also won’t be so keen to change because by shifting to a paradigm that focuses on preventative care (via remote monitoring), they will lose revenue. A hospital can make ten or twenty times more if a patient comes into the emergency room for a minor problem instead of going online and talking to a telehealth doctor, even though most consumers would be better off starting with an online visit. So it’s safe to say that they won’t be the harbingers of change. As more health systems shift to this new model because they lose patients to Teladoc, they will be forced to change though but for many, that means partnering with Teladoc to get referred patients for in-person care. Meanwhile, individual providers who are on Teladoc get to make extra money on the side so it’s a model that circumvents the bureaucratic health system.

As for companies like UNH, they don’t benefit from improving patient outcomes. They benefit from having a reason to charge policyholders a ton of money and paying out as least as possible. So providers are trying to charge insurers as much as possible by adding on follow-up visits, extra tests, etc. The underlying problem is that who decides what to buy, the person who pays for it, and the person who benefits from it are all different. So no one has the patient’s best interests at heart. This is creating opportunities to circumvent traditional health insurance by cutting them out of the equation entirely. Rather than opaque cost structure, consumers and employers get to know exactly what they are paying for and exactly what they’re getting in return. Like basically any other industry. Look at Livongo, consumers are choosing them even if they have insurance because it makes them healthier, so their care costs less. With the cost of care rising so much in the US, health plans are becoming unaffordable so the consumer has increasing financial responsibility. So basically, health insurers’ entire business model is getting disrupted and they’re going to lose a ton of revenue to disruptors like TDOC/LVGO either way. Trying to embed their own service in their plans isn’t going to work when consumers don’t even need their plans! Hemant Taneja, a managing director at the VC firm General Catalyst who helped ideate and build Livongo and oversaw the merger talks about all of this in his new book UnHealthcare, highly recommend reading it.

Saying that TDOC or LVGO will be commoditized is like saying that Uber will be commoditized. Anyone can get you from point A to point B but the value in Uber is that because it has the largest scale and the most popular brand, you can find a ride anywhere, at any time from a trusted driver. Now, this is especially true in healthcare which is infinitely more complex than driving a car, meaning that upstarts will have no chance of breaking in. What gives TDOC even more differentiation besides its provider network is its range of services, it will take a lot of investment, admin approvals, and technical skill to replicate the same end-to-end platform and while hospitals can replicate remote monitoring, I think it’ll be a stretch to say that they’ll do it at a speed that matches TDOC so their first-mover advantage will continue to widen. There is also more than enough room for multiple players. This is a space that will create multiple 100B+ companies over the next decade.

Anyone else have any thoughts on this?




Thanks for sharing your thoughts. What would you say to those of us who simply say this has become a complicated story? Before you brush this off a laziness, or just different investing philosophies, let me say my piece. We have had incredible success here by keeping things extremely simple. We have not invested in predictions of what will happen, but in what is already happening. We’ve invested in growth that is as simple and obvious as possible. For example, with CRWD or DDOG, you can literally see a steady rise in revenue, customers, etc, every single quarter. And it’s 99% organic. Gross Margins are 70 - 80%. So simple, but it works.

Whenever anything changes that beautiful simplicity, it’s a red flag, or a yellow flag at the very least. TDOC just made an acquisition that’s the size of itself! A true merger. I can’t imagine a more thesis-complicating event. You’ve expressed your predictions and your thesis eloquently, but are you making your life harder than it has to be with this one? It could very well work out and turn into a behemoth in the new healthcare landscape. Or they could grow in fits and starts (as TDOC has in the past), and struggle to get their hands around things. It’s just more complicated a company than I’m looking for.

Just curious what you would say to this concern.



I agree that much of what I said is a prediction of things to come (why patients will lead healthcare’s digital revolution) but I also think that we can see clear evidence of this thesis playing out today. With LVGO, the numbers were among the best of any SaaS company, it was clear that they had something special. With TDOC, it is less clear, even though growth accelerated to 85% this past quarter, they have historically grown at a fraction of that rate, have a lower gross margin profile, and a long history of acquisitions. However, I believe that COVID-19 has completely changed the telehealth landscape and they will continue to grow at rates high than they had historically for years to come.

Here’s a list of the regulatory changes:…

-Medicare will pay physicians for telehealth services at the same rate as in-person visits for all diagnoses, not just services related to COVID-19.
-Physicians utilize telehealth for both new and established patients.
-Allowing medical screening exams (MSEs), a requirement under Emergency Medical Treatment and Labor Act (EMTALA), to be performed via telehealth.
-Patients can receive telehealth services in all areas of the country and in all settings, including at their home.
-CMS will not enforce a requirement that patients have an established relationship with the physician providing telehealth.
-Physicians licensed in one state can provide services to Medicare beneficiaries in another state. State licensure laws still apply.
-Physicians can provide telehealth services from their home. Physicians do not have to add their home to their Medicare enrollment file.

Some pretty simple stuff on there like accessing telehealth services from your own home or paying physicians the same rate as in-person visits or allowing them to see patients in all 50 states. And those changes are being made permanent:…

So you can see how the Teladoc post-COVID is completely different from the Teladoc of before. And it opens up so much opportunity. I think that this remains one of the best growth stories on the market and this merger expanded their TAM and CAP considerably.

Also, TDOC forecasted 30-40% growth for 2021 pre-merger, and LVGO was going to come in way above that so next year I expect much higher growth than 40%. Then gradual deceleration since they said 30-40% CAGR for next “several years”. That should tell everyone something about how confident management is in their projections.


excellent discussion, In the keep it simple vane, I would add that Zoom itself may have also changed the telahealth discussion, I had never teleconferenced until Zoom, now would consider it for anything, and everything.


I agree that much of what I said is a prediction of things to come (why patients will lead healthcare’s digital revolution) but I also think that we can see clear evidence of this thesis playing out today.

Let me be clear – I’m not arguing with your predictions. I emphatically cede that you understand this industry better that I do, but I urge you to realize that you can only predict so much. I’m arguing that even if you’re correct about TDOC’s growing prominence in the healthcare industry, the stock may not be a winner. In your original post you compared TDOC’s competitive advantage to Uber’s. I think that’s fair…and yet, I don’t believe Uber is a stock to own, so why is TDOC? Just being a disruptive company with a massive reach isn’t enough. The business fundamentals have to be there.

TDOC’s Business Fundamentals
I don’t think they’ll have trouble growing at that 30-40% rate and maybe even a little faster for a while, but it’s still possible the stock could fail to win big. One big issue: Margins that aren’t fantastic could weigh them down. Their huge 85% revenue growth in Q2 coincided with a significant drop in gross margin (68% fell to 62%). Sure, you’d expect LVGO to help a little, but what if the downward forces are stronger? They had 3x as many visits YoY – maybe that held down gross margin. Also that means revenue isn’t driven by visits 1 to 1, so is that KPI as meaningful as we’d like it to be? I’m not saying they’re “buying growth” per se…but if margin decreases as growth increases, that’s a considerable concern.

What if future acquisitions, regulatory changes, and other unforeseen factors they can’t control, make it harder, or at least less profitable, for them to do business? This goes back to my simple point…I’ll let Yogi Berra make it this time: “It’s tough to make predictions, especially about the future.”

Personally I hope they succeed. I think they could be additive to the healthcare industry even if they can’t completely overhaul it. I think they could be great for the world. I just prefer not to have my financial future tied to these hopes.



We have not invested in predictions of what will happen, but in what is already happening.

As you say, I have invested in what is already happening, in Teladoc for its tele-health business model and in Livongo for its paradigm shifting business model that worked for me as an individual by breaking free from the conventional medical model. For me the merger does not change (break) either business model but strengthens them by creating a stronger capital position and by creating synergies. What could be simpler than that?

I cannot predict the future so I’ll be watching how this merger goes forward but I’m not going to be scared out of the positions unless events dictate a change of course. Currently healthcare and the obesity epidemic are among the greatest economic problems America has. The cure is to break the old model that has created these problems. The cure is to return medicine to where it belongs, to the doctor/patient relationship. Way too many bureaucracies are currently screwing up healthcare including government, insurance, big pharma, big HMOs, and malpractice lawyers… What is needed is a disruptive technology that is capable of taking on the incumbents that have created the mess and that is the investment thesis.

The risk to the Teladoc/Livongo merger is not what you imagine but the incumbents, the very powerful incumbents, fighting back. With a bit of luck, the incumbents will be defeated by the Innovators Dilemma. My thesis is that fewer people reporting sick through behavioral change will simply reduce the power of the Healthcare Industrial Complex that has captured the government regulating bodies.

Denny Schlesinger


My understanding of Teladoc margin story:

Teladoc discussed on their business update call on April 14:

Expected results for the first quarter of 2020 include additional expenses estimated at $4 million, associated with the company’s incremental investments in its physician network in response to the global outbreak of COVID-19, which is expected to impact reported gross margin and adjusted EBITDA margin during the quarter.

Teladoc Health’s First Quarter 2020 Earnings Report on April 30:

Gross margin percentage for the quarter was 60% compared to 65% in the first quarter of last year. As discussed on our business update call on April 14, the year-over-year decline in percentage gross margin reflects $4 million in incremental investments made to rapidly expand physician capacity in response to the outbreak of COVID-19 during the first quarter, as well as the robust visit growth and visit fee revenue mix in the quarter.

Teladoc Health’s First Quarter 2020 Earnings Report on June 30:

Adjusted gross margin, adjusted to exclude amortization of intangibles, was 62.3%, compared to 68% in the second quarter of last year and 60% in the first quarter. The year-over-year decline in gross margin is attributable to the robust visit growth and increase in visit fee revenue mix in the quarter. The sequential improvement in gross margin reflects significantly lower investment in physician capacity despite a 35% sequential increase in visit volume as the investments we made during the first quarter paid off.

In the nutshell, the company’s gross margin (60%) in Q1 was impacted by covid-19 investment in the first quarter. The gross margin (62%) recovered some in Q2 because of much less investment in physician capacity. The company intends to keep the mid-60s gross margin in the long run. During pandemic phase, the fluctuation of the current gross margin seems to be very reasonable.



First let me say LVGO is still my largest holding and I don’t plan on reducing (but I will keep a close eye on the new company’s progress!). Also, I completely understand anyone selling out because of the merger and current unknowns, and don’t begrudge them their profits, and I am definitely not trying to talk anyone else back into LVGO who has gotten out. But I don’t agree with your below comment about being unable to know the stated risks for the new company as a reason to not be invested.

What if future acquisitions, regulatory changes, and other unforeseen factors they can’t control, make it harder, or at least less profitable, for them to do business?

I’m not saying these things are predictable, but they are risks that every company in the world faces, “unforeseen factors” can come into play in any industry or company. To not invest because these might come up wouldn’t allow you to invest in any company. Look at Fastly and Tic Tok, the CRWD/Ukraine/DNC server issues last year, the EU penalties waged on the large tech companies along with talks in the US of breaking them up. I don’t think you can call this a risk just for TDOC/LVGO without exiting all stocks because of it.


Currently healthcare and the obesity epidemic are among the greatest economic problems America has.

I think this category is going to grow to be their largest, as there is such a huge TAM currently with the majority of people’s eating and exercise habits.


I think this category is going to grow to be their largest, as there is such a huge TAM currently with the majority of people’s eating and exercise habits.

I suggest Musk will blast humans off into space with “Buy’n’Large (BnL)” warehouse-club-spaceships before Americans change by choice?

I’m not saying these things are predictable, but they are risks that every company in the world faces…I don’t think you can call this a risk just for TDOC/LVGO without exiting all stocks because of it.

I think it’s pretty different from the other businesses I named, because:

  1. TDOC has a history of acquisitions including this merger
  2. The healthcare industry and its specific regulatory issues
  3. This particular moment in time – for now, it’s just unproven what the combined company (and its financials) will look like



Oh, I think they’ll change, not because it would be good for their health or anything but because they literally cannot afford not to. Without going into politics, look at how big of an issue healthcare is in this election. Insurance costs have skyrocketed and consumers and self-insured employers have chosen plans with ever-higher deductibles. So patients are paying out of pocket for everything but the most critical problems, and thanks to COVID, more people than ever are out of a job and hence, not covered. They’ll be looking for preventative services like LVGO that help them stay OUT of the ER at all costs and where they know exactly what they’re paying for and what they’re getting in return. Not some murky insurance plan that keeps charging ever-higher premiums, for the largest insurers, their greed will be their downfall.


Excellent site and analysis, thank you.

In the past 5 months, we have successfully used a
video-style call with our doctors.
Some were new “problems”, others a follow-up.
Some were set up using Zoom, others
with the hospital’s proprietary system.

Of the 8 calls that we have had, with
4 different doctors, the video part
was not really necessary (sometimes the
doctor did not even have their camera
turn on). But in all cases, just the information
received was necessary to resolve the issue-
seeing the doctor’s bookcase behind him/her was not!

So all the preparation to set up the call by the assistant
with the app, passwords, links, and then the waiting and waiting,
looking presentable, etc. was not necessary.
(If you’ve done it, you’ll know!)
Just a plain ol’ cell call would have sufficed.

Not sure if in the future, insurance companies
might not catch on to this fact and reduce the
amount of reimbursements and suggest just a
call w/o video.

My primary doctor was most satisfied that she was
getting any type of compensation from Medicare for the call as
she was in favor of this out-of-office consultation
method much before the virus.

Teladoc might be different (getting a random doctor)
but getting patient satisfaction at the lowest cost
is in everyone’s interest.

(I realize that getting and reviewing the patient’s
medical history online is also important but that,
in our case, was completed by the doctor asking a
few relevant questions, rather than reading thru pages
of medical history that have differing formats depending
on the hospital/ medical group).

Thanks again to all the posters on this site.

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For some reason I don’t see TAM mentioned in TDOC or LVGO discussions very often, so I just wanted to remind folks that almost 18% of the entire US GDP is spent on healthcare, and that number is only going to go up from here as the baby boomer generation ages and obesity/diabetes numbers continue to increase. Obviously TDOC’s TAM is not the entire healthcare sector, it’s a small fraction of it, but we’re still talking about an industry the generates TRILLIONS annually. The amount of money spent on healthcare makes the TAM of some of our favorite SAAS stocks look like pocket change.


Don’t just take it from me, here’s a medical professional’s opinion of the merger that I found on Reddit:

"I’m not sure if anyone listened to the conference call, the utilization and runway of growth for these 2 companies are virtually endless. Virtual care fills a tremendous, mostly ignored gap in efficiency and cost-effectiveness within the healthcare system. The use case is massive and can be used in thousands of different scenarios. There has been no company anymore groundbreaking in healthcare within regards to efficiency and streamlined use of complicated logistics until the recent past few years.

I work as an Emergency Dept. RN with almost 10 yrs experience. I remember last year EMS brought in a patient having a stroke who was treated w/ TPN in the field using telemedicine for assessment. This enabled a neurologist to examine him, and saved him 20 minutes of brain ischemia bc he would otherwise be treated in the ED after a ~15 min drive.

This tech fills a gap in care with almost infinite use cases.

During COVID in NY I was working 70 hr weeks doing overtime, taking care of COVID patients on the units and we were using TDOC Intouch on iPads to monitor the patients’ breathing without having to expose ourselves to droplets inside the room. Many of them were ICU level of care and telemedicine overall limited exposure from staff while still allowing us to provide effective care. Absolute gamechanger in every facet of healthcare.

The use case is massive and there has never been any of this in healthcare until recently. Combined with Livongo, they can grow exponentially to become a very large organization with acquired businesses to create a healthcare delivery system that benefits all parties, most importantly the patient.

Let’s put it this way, I would think of telehealth as a tool to be used daily.

I also do clinical rotations for graduate school at a primary care center. Do you know how many cases I have seen of someone taking the time out of their day to drive to our office and schedule an appointment when the complaint was nothing more than an insect bite. one look on telehealth and I could have saved them the trip, the appointment would have been open for a patient who needed to legitimately see a provider.

I do think Zoom are Skype could be used for something so minor, however I find the video quality, overall interface, design, and insurance backing of Tdoc to be more suitable for the healthcare setting.

Dermatology and Psych/behavioral health are in fact two specialties that are utilizing telehealth as the new mainstream.

Keep in mind, this is just primary health

Now for acute care, the push by hospitals, insurance, and evidence-based practice is to keep the patient out of the hospital or discharge safely and as early as possible. This saves the hospital, and insurance company money while limiting risk for the patient to develop Pneumonia, DVTs, nosocomial infections, septicemia, pressure ulcers, muscle wasting, and overall functional decline which are known risks of any hospitalization. many of the above mentioned are not reimbursable, the hospital is responsible to pay for the consequence, and so the hospital is incentivized to keep patients out of the hospital to avoid losing money. This is compiled with the fact the Emergency Departments in the United States are overcrowded, overused, and a safety net for a failed healthcare system which traditionally provides limited access to care, overuse of Hospital care, and represents a system that is burdened, mismanaged, and severely lacking of preventative care and patient education.

In fact, within recent years we are now just beginning to treat patients with acute care needs who are stable outside of the hospital and sending them home on IV infusion therapy with a home care service.

A comprehensive telehealth/health management system in place, when executed effectively I believe will substitute hospitalizations even further and reserve hospital need only for patients who are unstable or need very close monitoring, free up emergency departments from overcrowding, eliminate waste in the system, provide widespread patient access, and emphasize prevention and education tools in the comfort of home."


“We have had incredible success here by keeping things extremely simple.”

Hi Bear!

I agree it is necessary for a company to maintain as much simplicity as possible while growing as rapidly and as much as possible. But maximum simplicity is a means to manage growth, not an end.

When a business increases its number of transactions, however homogeneous, it increases complexity. When new businesses begin, founders tend to perform most tasks themselves, however menial. As the company scales, they hire others, which increases complexity and requires detailed policies and procedures to be written to instruct lower paid employees with less sophisticated judgement how to carry out the intent of owners. Additional employees alone increases complexity.(HR departments create far more counterproductive complexity than they are worth).

The simpler leadership can keep systems, the faster growth can be effectively managed. As you intimate and as Saul repeatedly reminds us, perhaps the essence of effective Internet/Cloud/SAAS/Software emerging behemoths is that they have been able to scale rapidly to huge size with more simplicity than pre Internet businesses.

But human capability, the drive to utilize one’s creative energies to the fullest, human time horizon, and the ability to handle complexity hasn’t changed at all. Throughout all recorded time, wherever humans have aimed to get large amounts of work done, the size and complexity of the projects have been a function of the vision/capability of the leadership.

We will soon see multi trillion dollar equities because today companies can grow revenue to much higher levels and yet operate with less complexity than the old giant conglomerates.

Companies still tend to grow or shrink to the size of their leadership, almost regardless of products and markets. It still requires exceptional leadership to build a great company. Vincent Roche, ADI CEO has said, “History is littered with the corpses of brilliant ideas that never found… (its way to market).”

IOW, there have been countless online retailers and software upstarts that have withered. Amazon, Microsoft, Apple, Google, Facebook etc didn’t become behemoths simply because Bezos, Gates, Jobs, Page, hit upon some good idea. A little luck helped for sure and living in the right technological time was essential. But IMO, those leaders would have likely risen to their full potential in one field or another. Each of them are 1 in a million people.

Moreover, it’s clear all of these companies have become enormously complex and require immense talent to remain on top. AMZN was comparatively simple when it was selling only books online. Same with MSFT when it was primarily licensing windows. Eventually to continue growing rapidly, these visionaries, with capability to burn in leading their businesses, looked for ways to expand.

Sometimes companies try to unwisely expand, when leadership is not big enough. That is the only question. One increasingly complex conglomerate Berkshire Hathaway, perhaps the only thriving conglomerate in our time, has me concerned that no one on the planet with the capability, passion, and integrity is available to fill Warren Buffett’s shoes. After a rewarding 30 year investment, i have moved on for reasons of succession and Buffett’s expressed desire to keep the conglomerate intact after his passing.

On the other hand Barry Diller has attracted my money because he has created the unique anti-conglomerate spin-off model with IAC.

You raise an interesting point that the great tech giants have grown mostly organically rather than via M&A. On the other hand, i don’t have anything to match the TDOC/LVGO marriage, but there has been MSFT’s $26B acquisition of Linked-in, FB’s $22B buy of What’s App (not to mention their Instagram steal), and AMZN’s $14B take-out of Whole Foods.

But for me the question is whether the TDOC/LVGO merger is necessary and efficient on the way to creating an online health care behemoth and does Gorevic have capability to burn. He clearly has a passion for executive leadership, which Tullman seems to have grown out of. Capability and the ability to handle complexity increases with age (see the work Elliott Jaques) and many young geniuses lose interest in the CEO role and look to address larger humanitarian problems as they age. You can see that with Gates, Musk, Bezos, Page, etc.

In a word, Gorevic does have the goods to manage a much larger, more complex company than TDOC/LVGO combined.

The above is all a little background undergirding my earlier optimistic post on the LVGO/TDOC merger which i paste again below:

My view on this is that these kinds of deals are often driven by top leadership preferences and that is likely the case here.

Glen Tullman 60, a leader with capability to burn considering the size and complexity of Livongo, meaning he could get his arms around a much larger company if he valued the executive role. But while Tullman is proud of what he and his team have built at Livongo and is very interested in the company’s future, his public statements of late intimate a desire on his part to move out of the executive role and focus more time on larger humanitarian matters (see his Ripple of Hope Award acceptance speech, among other comments).

Problem with that was LVGO size and complexity was growing beyond the point that current CEO Burke could handle, IMO. Then like a gift from heaven, up steps enormously capable TDOC CEO Jason Gorevic, who relishes being an executive and has the goods to run an S&P 100 level online health care behemoth and may grow the company to that size.

Tullman remains on the BOD of TDOC to provide vision and weigh in on important strategic initiatives, precisely where he is needed.

Very high conviction on this marriage. A match made in heaven.


You raise an interesting point that the great tech giants have grown mostly organically rather than via M&A.

Bill Gates bought DOS for $50,000. That was NOT organic, was it?

Apple bought NeXT when they brought back Steve Jobs. Was that organic?

Apple acquires Next, Jobs

In a stunning move, Apple will purchase Next Software and bring former CEO Steve Jobs back to the company he cofounded.

How many acquisitions has Amazon made in addition to Whole Foods?

Elon Musk bought an old Toyota plant in Freemont to start Tesla. Is that organic?

The Tesla Factory is an automobile manufacturing plant in Fremont, California, operated by Tesla, Inc. The facility opened as the General Motors Fremont Assembly in 1962, and was later operated by NUMMI, a former GM–Toyota joint venture.[1] Tesla took ownership in 2010.[2] The plant currently manufactures the Model S, Model X, Model 3, and Model Y employing 10,000 people as of June 2018.[3]

How many aviation companies has Boeing bought? Why is General Motors called Genera Motors? Because it is a conglomerate of a bunch of small car companies.

Organic is way overrated, in food and in business.

Denny Schlesinger


“Organic is way overrated, in food and in business.”

Good points captainccs!

I have a hard time seeing why the source of growth matters as long as it’s done efficiently, whether it’s rolled up or organic.

Cute quip also.

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My view is a bit different: Organic growth in some ways is more important, more predictable and should be valued slightly higher by shareholders. It shows that your current product line is useful, popular and provides value to your current customer base. It’s the surest way to build your business.

On the other hand, accretive acquisitions show that you are savvy on the use of the money returned by your current business. However, M&A is far riskier for a few reasons. While some successful examples arise, we’ve seen that many times acquisitions fail to deliver the shareholder value for the time and expense involved. Think AOL/TimeWarner, eBay/Skype, Daimler Benz/Chrysler. A few reasons: 1. They are difficult and time consuming to close & integrate in to the current operations. Take executive mindshare away from your current p-line. 2. Most executives and teams are successful at one thing. Very few are successful at several. So, most M&A’s are not nearly as valuable or successful as promised. Call it executive hubris. Everyone overestimates their own expertise. 3. It’s far easier to overpay than to find value in a target. You want it, well you’re gonna pay and that’s where the problems begin.

So while I certainly value organic growth and am skeptical of M&A activity; the point we would agree on is that once you pass these hurdles and have a successful integration, a dollar is a dollar.


I work at a company that used to grow by acquisitions. The growth was bought and market would be very happy. However the back end was a nightmare. The acquired came with their own system, values, VIP lists etc. These guys were bought out but many times their old chieftains were still around and they would run the acquired part as their own fiefdom. This resulted in many challenges for reporting as well as operations. The debt also kept piling on as the cost would always be a multiple of revenues and eventually the debt came to be too much since there were too many acquisitions and the debt burden could not be serviced by the profits from the acquired businesses. Till the time market is willing to lend money and overlook the balance sheet it seemed to be a great run and everyone was patting themselves on the back but once the market started to look at financials and started to demand financial discipline the sum of the parts just was not equal to the whole and the market cap went from the tens of billions to a chapter 11 filing. I do not believe these companies will go there and still have my highest percentage in LVGO but am going to keep a close watch and see how the merged entity behaves. That is the main reason I also took COUP off my list since I am now a lot more scared of companies that keep having to acquire to maintain revenue growth.


Cisco is nearly entirely composed of acquired technologies and acquired businesses. It is not like there are not very successful examples of this business model.

Whatever works.