Livongo stock has been a huge winner in 2020, with its shares skyrocketing close to 440% year to date. Some investors initially saw the Teladoc transaction as a bad move. But early doubts appear to have given way to optimism that the combination of the two companies could create a digital health juggernaut. Should you buy Livongo Health stock before the Teladoc acquisition closes?
Digging into the details
To answer the question, it's first important to dig into the details of the proposed Teladoc-Livongo deal. Note that both companies refer to the transaction as a merger. However, Teladoc is acquiring Livongo and is clearly in the driver's seat. Its shareholders will own 58% of the combined entity versus 42% for Livongo's shareholders.
Under the terms of the agreement between the two companies, Livongo shareholders will receive 0.592 shares of Teladoc for each Livongo share that they own. In addition, they will receive cash of $11.33 for each Livongo share.
Will anything change for Livongo shareholders if Livongo Health stock soars between now and when the transaction closes, assuming there are no roadblocks? What about if Livongo's shares plunge? In either scenario, Livongo shareholders will still receive 0.592 shares of Teladoc, plus $11.33 in cash for each Livongo share they own.
At first glance, it might seem that what happens with Livongo stock over the next few months doesn't matter. But it does. Because of the pending merger between Teladoc and Livongo, the fortunes of the two healthcare stocks are now intertwined. Basically, the share prices of Teladoc and Livongo will march in lockstep until the deal wraps up.
A dynamic duo
This means that whether you should buy Livongo stock before the acquisition closes depends on the prospects for both Livongo and Teladoc over the next several months. What are those prospects? I'd say they're very good for both companies.
Livongo has signed contracts with four Fortune 100 companies this year. It added more programs to an existing contract with the New Jersey State Health Benefits Program and School Employees' Health Benefits Program. The company also significantly expanded its relationship with a Fortune 100 aerospace company, with all of the customer's eligible employees and their dependents now able to access Livongo's diabetes management platform. These wins should translate to increased subscription revenue going forward.
In its second-quarter update, Teladoc boosted its outlook for the second half of 2020. The telehealth services provider continues to enjoy strong demand for its offerings. It also completed the acquisition of hospital telemedicine company InTouch Health in July, a deal that will significantly increase total revenue.
Arguably the most important potential catalyst for both stocks is the ongoing COVID-19 pandemic. Some experts are worried that the fall could be especially bad. But bad news related to the pandemic will likely be viewed as good news for Livongo and Teladoc as demand for virtual care services rises.
Buy Livongo now?
Telehealth will only increase in popularity as a result of the pandemic. Chronic diseases aren't going away and need to be managed more effectively. Joining Teledoc's telehealth services with Livongo's chronic disease management platform makes sense strategically over the long run.
My view is that buying Livongo Health shares before the close of its acquisition by Teladoc is a good idea. I expect that each of these companies will report positive Q3 results, giving their stocks a lift prior to the anticipated closing. More importantly, I suspect that investors will more fully appreciate the value that the combination of the two companies offers.