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The surprise merger of two health tech companies that have thrived during the pandemic has sent shares of both to the sick bay. Here's why traders are wrong and how this is a great deal for consumers and shareholders.

First the news: This morning managers at Teladoc Health ( (TDOC) - Get Teladoc Health, Inc. Report) announced the company will spend $18 billion to grow its industry leading remote medicine business.

The company will acquire Livingo Health ( (LVGO) - Get Livongo Health, Inc. Report) in a cash and stock deal that is expected to close later this year. Livingo operates a telemedicine business focused on patients suffering from diabetes and high blood pressure.

Telemedicine is one of those face-palm ideas. Having doctors diagnose patients using videoconference technology is a no-brainer. It should be everywhere.

It took a global pandemic to make Teladoc a household name for consumers and a regular member of the new-high list for investors. Thankfully, the business has not disappointed.

Company managers in June noted that total virtual visits rose to 2.8 million during the second quarter, a threefold increase over the same quarter a year ago. Sales surged 85% year over year, and managers forecast revenues will rise between 30% to 40% in 2021.

Livingo is the perfect addition to grow the company even faster.

The San Francisco, Calif.-based company uses remote sensors, networks and data science to help people manage their weight, diabetes, hypertension and behavioural health, backed up by personal 24/7 live coaching.

Livongo began by developing a remote glucose monitor. The smartphone-sized device accepts blood sample test strips and automatically sends the information via WiFi to the patient’s private account at Livongo. From that point, it’s all software. The data is analyzed and sorted. If anything is out of the ordinary, a private coach will call immediately to set the patient on the right course.

Membership has grown to 328,000 members, with participation from four of the seven largest health plans in the United States. And managers are working through the details of a federal contract possibly worth 5.3 million members.

Those government contracts are important. The Trump administration announced Monday a plan to bring telemedicine to Medicare patients in rural communities. There is also bipartisan support to advance remote medicine for people living in urban and suburban communities.

A government program like Medicare is a logical candidate for telemedicine. It would provide patients with better service, and it would save billions in emergency room visits. There are 1.25 billion ambulatory visits every year. Jason Gorevic, Teledoc’s chief executive officer, estimates that 25% could be covered by telemedicine.

Getting more Federal money will supercharge Teledoc’s already potent business model.

Teladoc offers a scalable, fast-growing virtual healthcare platform with access to multi-specialty physician networks, from general medical and mental health to dermatology.

For 70 global insurers, 300 hospital systems and 40% of the S&P 500 companies, the platform is critical to providing efficient and cost-effective healthcare.

According to a March investor presentation, sales have grown at a 55% compound average growth rate since 2015. During that time, revenues jumped from only $77 million to $553 million in 2019. For the current year, the firm is projecting sales of $703 million as Teledoc care providers oversee 5.7 million patient visits.

Many of those visits are referrals from health systems providers like UnitedHealth Group ( (UNH) - Get UnitedHealth Group Incorporated Report)  and Premera Blue Cross, or large enterprises such as 3M Corp. ( (MMM) - Get 3M Company Report), T-Mobile ( (TMUS) - Get T-Mobile US, Inc. Report) and Home Depot ( (HD) - Get Home Depot, Inc. Report).

These businesses are using Teladoc’s scale advantage to deliver up to 35% savings over in-person visits. The greater number of visits, the more savings derived.

Teladoc shares are down sharply following the Livingo acquisition news. The stock may need to digest some of its recent gains. Shares are still up 156% in 2020. However, the business is stronger with Livingo.

Longer-term investors should consider buying the stock into this pullback.