I am a big fan of the Coffee Can Portfolio, an “Active Passive” approach to investing. The idea is simple: You try to buy a basket of the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.

You can see my Coffee Can stocks (and their performance) here on my Scorecard. Coffee Can 6 is still under construction. It has 4 stocks so far. Hoping to add a few more before the end of the year.

As stock market investors, we have no say in how public companies are run. 

Our job as passive investors therefore is to invest in CEOs we can trust. They're really the ones in charge, and have disproportionate power and influence over a company’s results. 

I tend to invest in Mavericks. Mavericks are disruptive innovative organizations. Sometimes they do things that are obvious. Sometimes they make unexpected moves. I refer to these moves as “Defer to the CEO” moments. These are moments when we as investors need to ask ourselves a difficult question: “Do we still trust the CEO’s judgement”? After all, they’re the ones running the business. We’re simply along for the ride.

With that said, let's talk about Teladoc (TDOC), and a recent “Defer to the CEO” moment.

For those who’re unfamiliar with the company, Teladoc is the global leader in Virtual Care. I’ve written about them before, here and here. On August 5, 2020 they announced a merger with Livongo Health (LVGO), the leader in Remote Monitoring. The merger was unexpected, and initially thought to be a bad deal. After the announcement, Teladoc’s stock price dropped by almost 20% in a day. People felt too high a price was paid. After all, LVGO could have been bought for one-fifth the price just months earlier!

News of this merger is clearly a “Defer to the CEO” moment.  

Let’s Put Ourselves in the CEO’s Shoes…

According to CNBC, it was Jason Gorevic, CEO of Teladoc, who proposed the idea of a merger. Why did he do this?

Jason Gorevic has run Teladoc since 2009, that’s ~12 long intense years. During this time, Teladoc has become the global leader in Virtual Care. This company is clearly “his baby”. 

During his leadership, Teladoc has:

• Invented the current subscription + visit fee revenue model. Getting to this stage must have taken several experiments and failed attempts. 

• Demonstrated high quality care in order to successfully expand into new verticals and countries.

• Built a strong reputation, and therefore amassed significant relationships and system integrations with key market constituents like insurers and health systems.

• Successfully fought many lawsuits, and navigated through several regulatory and compliance challenges.

The market was difficult to navigate for a very long time, but now, with the help of Covid, the market has blossomed, and we may be witnessing what are likely to be permanent shifts in telehealth reimbursement rules and the removal of arbitrary restrictions for delivering care across geographic boundaries.

This all sounds amazing. The company seems to be firing on all cylinders. 

So why then did Jason choose to dilute his shareholders by more than 40% (LVGO was acquired for about ~$18 Billion and the combined company will be worth about ~$37 Billion)? 

That’s one heck of a bold move!

Consider This: Perhaps it was Necessary? 

It sounds like perhaps Jason thought the merger was necessary.

In my opinion, Covid has finally brought this lucrative virtual care market past the point of inevitability. As a result, over the coming years, I expect lots of competition to emerge. Jason likely believes that Teladoc stands a much better chance of combating this oncoming competition by merging with Livongo, rather than competing against it. 

So, Now What?

Only the future will reveal whether the merger was ingenious or stupid, whether the two companies will continue to innovate and whether they will find a way to co-exist well together. 

So, as investors, what should we do?

We must ask ourselves two questions: 

1. Has the investment thesis changed? and 

2. Do I still trust the CEO?

If the answer to (1) is No and if I still trust the CEO, then my decision is pretty simple. I prefer to defer to the CEO, and give him the benefit of any doubt. Because for the time being, he deserves it. 

Of course, this is not blind faith. We need to keep a close eye on the merger, and see how the situation develops.

Has the Thesis Changed?

To me, nothing’s really changed.

When I invested, the bet was that TDOC will become one of a handful of companies that will play an important role in revolutionizing healthcare delivery. Earlier, on May 28 2020, I wrote the following:

I had also written that, as the leader in the space, Teladoc now controlled its own destiny, and needed to focus on maintaining its lead.

Well, Teladoc remains the leader today. With Livongo Health, Teladoc can fill a potentially gaping hole in its virtual care offering, namely Remote Monitoring. Seems to me, that this merger is a good thing, and the thesis is still very much intact.

Do I still Trust the CEO?

In short, yes. 

The merger seems to be a major attempt at defending Teladoc’s leadership position. This merger should expand Teladoc’s offerings and create a more comprehensive virtual care platform. And according to company forecasts, this represents an opportunity for $500 million in revenue synergies by 2025. All positive things that should improve Teladoc’s competitive market position.

That said, I wrote earlier that one of my concerns about the company was its “growth by acquisition” strategy.

Teladoc continues to be acquisitive. But this strategy has worked for them so far. The Livongo Health merger however is at a whole nother level. This is almost a merger of equals. Therefore, a successful integration will be a major test for the company. 

But, if they can get through this, Teladoc will emerge significantly stronger on the other side. I remain cautiously optimistic and will continue to monitor how things play out. 

I believe that when we look back at this merger several years from now, it will be seen as a pivotal moment in the company’s history. (On a side note, I wouldn’t be surprised if a HBS Case is written about it...so if you come across one in the future, do please share it with me!)

The good news is that Jason Gorevic will remain CEO. He’s the mastermind behind the merger and seems to be doing what’s necessary for the company’s future. He is the person I bet on before the merger, and he is the person I am betting on now. 

For now, I am willing to defer to the CEO. 

Wrapping Up

As stock market investors, we have no say in how public companies are run. 

Sometimes companies do things that are obvious. Sometimes they make unexpected moves. Teladoc’s acquisition of Livongo Health is one such unexpected move. 

I refer to these situations as “Defer to the CEO” moments. These are moments when we as investors need to ask ourselves a difficult question: “are we still comfortable deferring to the CEO’s judgement”?

If the investment thesis is still intact and if I still trust the CEO, then my preference is usually yes. Because for the time being, they deserve it. Of course, this is not blind faith. We need to keep a close eye on how the situation develops.

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