By Jack Lee, Heather Leung and Terry Au-Yeung (HKUST), Sonia Andrzejuk, Argyro Charizona and Vlad Marcu (Bocconi)
Photo: Hyttalo Souza (Unsplash)
Overview of the deal
Target: One Medical
Implied Equity Value: $3.9bn
Closing date: July 2024
Acquirer Adivsors: Morgan Stanley (Financial), Cooley, Ropes & Gray (Legal)
Target Advisors: Goldman Sachs (Financial), Paul, Weiss, Rifkind, Wharton & Garrison LLP
US-based tech giant Amazon [NASDAQ:AMZN] on 21 July 2022 announced that it has agreed to acquire 1Life Healthcare (One Medical) [NASDAQ:ONEM], a San Francisco, California-based operator of One Medical primary care facilities for $18 per share in an all-cash transaction valued at approximately $3.9bn, including One Medical’s net debt. By making its third-largest acquisition to date, Amazon highlights its continued interest in healthcare after years of investing in healthcare, with mixed results.
“The opportunity to transform health care and improve outcomes by combining One Medical’s human-centered and technology-powered model and exceptional team with Amazon’s customer obsession, history of invention, and willingness to invest in the long-term is so exciting” - Amir Dan Rubin, One Medical CEO
Company Details (Acquirer - Amazon)
Amazon.com, Inc is an American multinational technology company that focuses on e-commerce, cloud computing, online advertising, digital streaming, and artificial intelligence. It was founded by Jeff Bezos from his garage in Bellevue, Washington, on July 5, 1994. Initially an online marketplace for books, it has expanded into a multitude of product categories. Amazon has earned a reputation as a disruptor of well-established industries through technological innovation and "aggressive" reinvestment of profits into capital expenditures.
Founded in 1994, headquartered in Seattle, Washington, United States
CEO: Andy Jassy
Number of employees: 1,468,000
Market Cap: $1,089bn (as of 15/10/2022)
LTM Revenue: $485bn
LTM EBITDA: $50.6bn
LTM EV/Revenue: 2.49x
LTM EV/EBITDA: 23.88x
Company Details (Target - One Medical)
One Medical is a nationwide human-centered and technology-powered primary care company in the United States, offering seamless digital health and inviting in-office care next to where people work, shop, live, and click. The aim of One Medical is to satisfy millions of members by providing better health and treatment while lowering costs in a better team atmosphere.
Founded in 2007, headquartered in San Francisco, California, United States
CEO: Amir Dan Rubin
Number of employees: 3,090
Market Cap: $3.3bn (as of 15/10/2022)
LTM Revenue: $891.5mn
LTM EBITDA: $-245.4mn
LTM EV/Revenue: 4.08x
LTM EV/EBITDA: n.m.
Projections and Assumptions
One Medical is not yet profitable and it operates a low-margin business. Despite this, the dilution effect for Amazon will be insignificant given the relatively small size of this all-cash deal compared with its own scale. Amazon also has deep pockets to invest in capabilities to grow its healthcare presence as shown by the high premium of 76.8% it agreed to pay for One Medical. These were reflected by their share price performance on the day of announcement respectively, where the share price of One Medical saw an increase of 69.5% while that of Amazon more or less remained unchanged.
The acquisition will enable Amazon to strengthen its healthcare business immediately. The tech giant, in fact, also disclosed its plan to cease the operations of Amazon Care, which offers virtual and limited in-person primary care to employer customers, by end of year shortly after the deal was announced. It is believed that One Medical operates a much more sophisticated version of Amazon Care with 188 clinics, more than 8,000 employer clients, and the invaluable member data. Cross-selling opportunities and synergies can also be realised quickly between the care delivery side and pharmacy side with Amazon’s own significant assets of technology, consumer platform, and delivery network. Thus, even in the short run, the strategic move can already help Amazon largely expand its healthcare portfolio in terms of both depth in the primary care segment as well as width in other segments including pharmacy and diagnostics.
The acquisition can foster synergies, helping the success of Amazon's medical business. Amazon itself also had a healthcare service called Amazon Care, but this project failed eventually. It proved that the medical sector has a high entry barrier and it is difficult for a new entrant to succeed in the medical market. By acquiring new medical companies, Amazon can make use of the existing market strategies of One Medical to establish its presence in the industry first.
In the long term, the acquisition can help integrate Amazon’s technology ecosystem into the medical industry. Amazon, as a tech giant, has accumulated a lot of insights into artificial intelligence (AI) and automation capabilities. And these advantages can be applied to the One Medical platform. Amazon can thus focus on advancing the medical platform from One Medical, rather than developing a new one on its own. For example, Amazon can make use of its feeding algorithm in the Amazon platform and apply it to the medical sector, improving the ability to attract new patients to the platform. In addition, approximately 44% of Americans have an Amazon Prime membership, while the largest U.S. health system, HCA Healthcare, provides service to just 1% of Americans. This existing market power, together with Amazon's technological strength, would help utilise One Medical’s online pharmacy and diagnostics business, having a synergy effect and gaining more market share in the long term.
Risks and Uncertainties
At a high 76.8% share premium over its closing price, news of the offer drove share prices of 1LifeHealthcare (One Medical’s parent company) up 69% on the day of signing. However, given One Medical’s historical performance, Amazon’s varied success in the healthcare sector, and the significant antitrust scrutiny it faces, it remains unclear whether the acquisition will fulfil its years-long healthcare ambitions.
Since its inception, One Medical has experienced strong growth in overall size and revenue figures but has yet to turn a profit. The primary healthcare provider saw revenues up 64% YoY from $380 million (2020) to $623 million (2021), but reported a near 187% jump in losses from $89 million to $255 million in the same period. Although such figures are relatively immaterial in comparison to Amazon’s size, having experienced two consecutive quarterly losses, the move may be risky for the tech giant’s bottom line. This is especially as the underwhelming results were largely attributed to inflationary pressures and supply chain disruptions which show little signs of easing.
Though reasonable, given an industry wide scramble to harness health data, the move is also surprising considering the big tech’s decision to shut down its own telehealthcare service, Amazon Care by year end due to an inability to meet customer needs. The demise of Haven (a joint venture with JPM Chase and Berkshire Hathaway) in 2021 further casts doubts on Amazon’s efforts to break into healthcare.
Investigations by the FTC, headed by Amazon-critic Lina Khan may hinder the consummation of the transaction before year-end, which would cost Amazon a hefty 10% of the deal price in reverse termination fees. However, analysis of past interventions suggests unlikely pushback. While most mergers blocked by the FTC were characterised by significant horizontal overlap, Amazon’s current healthcare offerings are modest. Data on significant antitrust merger investigations also highlights a favourable 2 month fall in average duration from 12.6 months (Q1 2022) to 10.7 months (Q2 2022) - a new low since 2019. Previous success in deals of similar nature, such as Walgreen’s acquisition of VillageMD (2020) and Cigna’s acquisition of MDLive (2021) further point to probable success.