With Livongo, did Zane Burke sell a lemon to Teladoc’s Jason Gorevic?

The story has been updated with perspectives from Teladoc after initial publication.

Zane Burke was at J.P. Morgan’s annual healthcare conference earlier this year touting Quantum Health, which he leads as CEO, as one of the pre-eminent companies in the healthcare navigation market.

That might well be true. However, Burke also led the $18.5 billion mega-deal back in 2020 that brought Chicago-based Livongo into the fold of Purchase, New York-based Teladoc. Back then, both companies as well as industry watchers heralded the combination as a symbol for what is possible when ambitious digital health companies come together to chart a new path during a seismic, global public health event.

Since then, the fates have not been kind to Teladoc Health. The telemedicine platform that shelled out a pretty penny to buy Livongo’s fast-growing chronic disease management platform has seen unexpected losses; spiraling downward stock price; a shareholder lawsuit, which Teladoc believes is frivolous; and a new, post-pandemic reality of falling telemedicine visit volume nationally though Teladoc contends it has actually seen increases in its own platform between 2019 and 2022. In the first quarter of 2022, Teladoc took a whopping $6.6 billion charge to write down the value of its Livongo acquisition that had been loudly proclaimed to be a major tool to achieve healthcare nirvana in the form of consumer convenience, lowered costs and improved outcomes.

What happened? Was Livongo a good business? As Burke promotes the strength of Quantum to investors and journalists — a company that could be on the cusp of an initial public offering — should the Livongo history give pause? I got my chance when I met Burke in San Francisco during  JPM.

“Did you sell a lemon to Teladoc or did they mess up? I asked.

Burke did not miss a beat as he shot back, politely:

“We didn’t call them to do the transaction,” he said. “We had just raised half a billion dollars. We had results that were triple-digit growth on the top line, 70+ margins and we had just turned EBITDA positive. That’s when we left the business. When we left the business, it was a freaking good business.”

Thereafter, Burke provided a lengthy commentary on what he felt went wrong. [slightly edited for clarity]

The sad part is that very little Livongo DNA exists at that company today. Of my top 16 associates, zero are still there. The brain drain happened immediately and it didn’t have to be that way. It turned out that way.

On my worst days, I am not as bad as somebody tells me I am. On my best days, I am not as good as sometimes the press clips will say. And what I would say about Teladoc is that, they really liked themselves a lot and had a very strong opinion of their talent and how clever they were, and they were a roll-up. We were an organic growth [company] with intellectual property.

We had the same vision. The statements we made at the time were not lies. The visions were the same — integrated virtual care. So that part was true. The fallacy was the drastically different cultures. I actually like Jason, but the first time ever I was in the room with him was this last fall. We did the entire transaction virtually.

So I would literally say, terrible timing from a how-to-do-the-integration side and to not make it where you wanted to create reasons for people to want to stay.  “Hey your deal should have made Zane stay for two years,” and be locked up and all those kinds of things.

I think putting handcuffs on people is a terrible idea but creating incentives for why people want to be there — that’s important. 

I was probably not going to stay unless I was CEO of the combined entity. My ego is not that big, but I felt that from every spot on the team, my Livongo person was better than their person and they took one of my top 12 leaders. That was my HR person.

Jason is a partner [Teladoc is a partner of Quantum Health]. I think that his vision of integrated virtual care is a great vision and that to me still makes sense and I think they can still achieve that.

Gorevic, through a Teladoc spokeswoman, declined multiple requests for an interview via video, including an offer to delay publication to accommodate his schedule. Instead, a statement was made available with an instruction to attribute it to a “Teladoc spokesperson.” 

The merger was a stock-based transaction at the height of the pandemic, before a seismic shift in the macro financial environment and corresponding market multiples, and the non-cash accounting charges that we’ve taken have been well covered. Here’s what hasn’t changed: No one has the scope, scale and expertise that we do. We have the right strategy, positive operating cash flow, and nearly a billion dollars in cash on our balance sheet. Teladoc Health is in the best position of any company in digital health to win right now. On a stand-alone basis, Livongo was the leader in chronic care management solutions, and those have contributed meaningfully to our leadership in fully integrated whole-person care today.

The statement notwithstanding, others appeared to agree with Burke’s assessment of a cultural chasm between Teladoc and Livongo.

A senior Wall Street analyst — Jailendra Singh, managing director with Truist Securities — weighed in like this.

I think Teladoc and including us, we probably underestimated the cultural integration between the two companies. The two companies were very very different.

Just from a business point of view, the synergies made sense. You have a very good membership base on the core Teladoc side — almost like 70-80 million lives. You layer on top of that Livongo, which is selling diabetes, hypertension and mental health solutions. You have a great opportunity to cross-sell those Livongo solutions into your employer and membership base. Logically it made a lot of sense.

They just probably struggled to integrate the two companies and as I said, sometimes we are so much focused on the business integration and technology integration and we probably under-appreciate cultural integrations. That is equally important and that resulted in them losing some key personnel, and growth slowed down.

I also think that the market got more competitive. Some of their competitors like Omada Health and Virta Health have actually been gaining market share.

As a Credit Suisse analyst at the time the deal was announced, Singh upgraded Teladoc stock to hit $249, declaring that the deal would create a “digital health giant.” Teladoc’s shares closed at less than $30 on Friday.

While many like Singh believed in the potential synergies, not everyone was swayed. Forbes Contributor Peter Cohan, founder of an eponymous strategy consulting and venture capital firm, warned in August 2020 that there were significant risks to the merger and Teladoc had “not done a good enough job of making its case.”

Now, more than two years after the merger was completed, a seasoned healthcare lawyer declared that he too had his doubts from right from the start about this union.

“Teladoc was never able to effectively drive its members into chronic care because those nurse practitioners in the Teladoc model were not being incentivized to find the chronic conditions and to cross sell,” said Eric Klein, partner of Sheppard Mullin’s national healthcare practice, in a recent interview. “The employers also didn’t create those incentives. If the employers had created those incentives for employees to go ahead and utilize the Livongo services, then that might have worked as well. But they didn’t do that.”

A Teladoc spokesperson refuted this characterization saying that “board-certified doctors are at the heart of our model” noting also that in 2019, only 3% of Teladoc’s members were using more than one of the company’s chronic condition management programs. Fast forward to today and it is 28%.

Still, Klein believes that the failed union could be attributed to two very different business models.

If you look at what the initial Teladoc subscribers were using it for – “My kid’s got a fever” or “I don’t feel good what should I do” etc. It’s much more acute, much more low-grade and transactional, very transactional.

You contrast that episodic approach with Livongo, which is all about chronic disease management, and for that to be effective, you need long term, continuing, longitudinal engagement. So you are taking a transactional model, which is a round hole and trying to put it into a square peg or vice versa. So, there wasn’t a bridge there between the two.

It’s very easy to overestimate demand and it’s very easy to underestimate the administrative difficulty in sales and marketing. We just see this over and over again where people think, well because it’s somewhat related, you push another product down the same distribution channel, and it’s not the case. 

It appears as though the Teladoc-Livongo saga, at least as it reflects two different cultures and business models, has parallels with another failed marriage. Back in 2012, DaVita, the operator of dialysis clinics, paid $4.42 billion to buy HealthCare Partners, the country’s largest operator of medical groups and physician networks. But the merger did not go as planned and the combined company struggled. In the end, DaVita sold off the business for $4.3 billion in 2019 to UnitedHealthcare’s Optum business unit and divested HealthCare Partners of Nevada to Intermountain Healthcare to appease the FTC’s antitrust concerns.

Culture and business model disparities aside, was it even the right time for Livongo to sell? Klein believes that young, founder-driven companies arrive at a crossroads after the early years when the founders give it their all to establish the business. Then, it’s either investing more to hire an effective middle management layer that increases expenses and perhaps slow down that growth, or selling to cash out.

“When you are growing a company you either go ahead and say, “We are going to be independent for a long time,” so you make that investment and everybody just accepts it. Or you sell before you make that investment, which is what Livongo did, Klein said. [It’s important to note that Burke was not the founder of Livongo. That was Glen Tullman, who stepped down from the CEO role but remained chairman in December 2018 when Burke took over.]

After the sale, top Livongo executives did not join Teladoc. Of the leadership team, only Livongo’s Chief Human Resources Officer, Arnnon Geshuri, stayed on with Teladoc after the deal closed. He remains at the company.

Allowing managers to leave may not have been the right strategic move.

“If you are going to pay a high premium for a company, you need to make sure that you have all the company resources there to provide a return on that investment,” Klein said. “If management has been effective, if management has been growing the business … and they are not there, of course, you are not going to maintain that growth.”

In fact, Truist Securities’ Singh only projects high single-digit growth for the Livongo business this year.

“Livongo is still a decent piece of their business but the growth has dramatically slowed down compared to where it was when [Teladoc] bought it,” he said.

Still, the $6.6 billion write-off was actually a smart move despite the news cycle it generated last year.

“To my mind, this shows that Teladoc thinks they are going to be successful going forward because when you do a large write-off you typically flush them through to clear the pathway for the good stuff, Klein said.

The “good stuff” is, of course, BetterHelp, the direct-to-consumer virtual mental health platform that Teladoc acquired in 2015 for roughly $3.5 million. That business brought in $1 billion in revenue in 2022, Teladoc reported earlier in January. That may bode well for the future too as behavioral health interactions account for a lion’s share of virtual visits today, according to one report.

“So because they are doing the behavioral health piece — the BetterHelp piece — they don’t want the bad news about Livongo to stay around so they are going to take their hit and then they are going to move forward here,” Klein said. “So expect, probably to see a lot more good news about BetterHelp.” 

2023 might be the year to change the Teladoc narrative but a lot of positive news has to come to change equity research analysts’ minds. Currently, only four have a buy rating to Teladoc’s stock, one rates a “sell” while 22 rate it as a “hold.”

Photo: Irina Glushenkova, Getty Images

Editor’s Note: The author’s husband owns Teladoc shares, but the author doesn’t. 

Correction: An earlier version misspelled Eric Klein’s name. Also, CFO and COO resignations happened before the merger announcement.