July 22, 2022

Breakingviews: Amazon’s M&A random walk wanders into healthcare

by Breakingviews.

Few investors would have predicted Amazon.com’s latest acquisition. But the internet giant’s $3.5 billion purchase of One Medical, which operates doctors’ offices in big American cities, fits with founder Jeff Bezos’s love of messy experimentation – provided the market is big enough.

Like previous acquisitions, Amazon’s third-biggest deal to date appears to follow a random walk. It purchased upscale grocer Whole Foods Market for $13.7 billion in 2017. An $8.5 billion acquisition of the MGM film studio closed in March.

Previous deals have had little obvious impact on the company’s fortunes. Despite absorbing Whole Foods, Amazon’s share of the U.S. grocery market was less than 3% last year, according to research outfit Numerator. Meanwhile, the company unveiled its acquisition of MGM’s content catalog for a huge premium when the streaming market was at its most exuberant.

The latest acquisition fits with Amazon’s increasing interest in healthcare. The Seattle-based company has a big mail-order pharmacy business and sells lots of other healthcare supplies online. It provides telehealth and is opening doctors’ offices in some big American cities. Paying a roughly 70% premium for San Francisco-based One Medical advances this strategy.

Yet as Bezos pointed out in his 2018 shareholder letter, a bit of messy wandering is justified if the prize is big enough. Though healthcare accounts for 20% of American GDP, few consumers are happy with the service they receive, making it potentially attractive for a deep-pocketed new entrant. Besides, Amazon’s interest is unlikely to face opposition from antitrust regulators; its involvement could increase competition in the monopoly-prone healthcare market.

It’s far from obvious that Amazon will succeed. One Medical’s nice offices and minimal wait time appeal to patients, which explains why the company’s revenue doubled in the first quarter. Yet the firm loses money consistently and burns cash. And primary care is less expensive and annoying than hospitals and medical insurance. Hospitals account for about a third of medical spending, according to the U.S. government, swallowing 50% more than physician and clinical services.

Yet Bezos’s 2018 missive also argued that failure needs to scale. Amazon would be neglecting opportunities if it didn’t have an occasional multi-billion-dollar flop. For shareholders in the $1.3 trillion company, its latest deal represents an affordable experiment.

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