Hi friends,

I shared a draft of this with a colleague for feedback. She very kindly replied, “eh Stev, why are you writing about this?”.

My first answer was because I thought it would be fun (it was).

My second answer was that I thought we could learn a lot by forcing ourselves to think through hypothetical decisions like this. We can certainly learn more about these two businesses, their strategy, valuation and how they operate, but also about the mental health market more broadly.

So that’s why I’m writing about this hypoethical deal.

I hope reading it is as fun and informative as it was to write.

Let’s get into it.

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What’s the background here?

Well, Lifestance are a large, hybrid, outpatient mental health provider. Last year, they made $1.25B in revenue, growing at 19% YoY. For the last few years, they’ve been on a strategic journey to turn around the business and make it profitable. In fairness to them, they’ve largely succeeded, delivering their first quarter of positive net income in Q1 2025 (even if it was only $700,000).

Despite their growth and shift to profitability, their share price has been pretty much flat since 2022.

Their current strategy is based on growing their existing business by opening new centers and selectively acquiring other small players. In their most recent earnings call, they also shared an appetite for buying other kinds of businesses, not just mental health clinics. These include higher-margin, specialty services like TMS or Spravato clinics or even digital therapeutics companies.

But do they have an appetite for something bigger? Something that could generate truly meaningful value for shareholders?

And if they do, could Talkspace be the business they look to buy?

Talkspace’s story

Talkspace have been on a similar turnaround journey. After their IPO in 2020, they were burning money and their share price tumbled.

But new management came in, implemented an aggressive strategy, shifted away from consumer to Payor and Enterprise channels, and implemented strict cost-cutting.

For the most part, it worked. They went from a net loss of $79M in 2022 to a net profit of $1.2M in 2024.

Today, Talkspace are a large telehealth platform, making $187.6 M of revenue in 2024 and growing at 25% YoY. They also delivered $7M in adjusted EBITDA and a positive net income of $1.1 million. They have over 200 million covered lives across a wide range of payers and Medicare approvals in ~40 states.

Over the next two years, they forecast to grow revenue to almost $300M with $45M of adjusted EBITDA by 2026.

For sure, these would be significant improvements over their performance in previous years, but they are still a long way off the kinds of growth and profitability that would justify a big increase in their valuation.

They are telling the markets a story about their data advantage and AI capabilities, but they have yet to show much tangible impact of new products in this space.

Talkspace have also made it known that they are willing to be acquisitive to support their growth.

But if an acquirer came knocking on their own door offering a good price, I think they’d at the very least invite them in to hear what they have to say.

How the companies stack up

Lifestance is about seven times larger, growing marginally slower (19% vs 25%), with much better EBITDA margins but far worse net income margins. Lifestance has a significant physical footprint with over 500 clinics, whilst Talkspace is a purely digital player. Both companies have healthy balance sheets, with each of them holding over $100M in cash, Talkspace having no debt, and Lifestance holding about $270M in long-term debt obligations.

Is that a good match-up for a potential acquisition? Let’s see

Testing the thesis

Now that we understand where both of these companies are today, let’s see what a potential acquisition might look like and if it would make sense.

Say Lifestance were to buy Talkspace, what would be the thesis?

Here’s how I’d position it.

Buying Talkspace would enhance Lifestance’s position as the leading provider of outpatient mental healthcare in the US. The combined entity would have a huge covered lives population spread across diverse payer groups, and importantly, with the strategic capabilities to activate this population. Lifestance’s clinic footprint, combined with Talkspace’s brand and digital marketing capabilities, would be a powerful client acquisition engine. The large provider network of the combined entity would ensure adequate liquidity of supply to meet this demand.

There would also be significant cost synergies (ugh, I hate that word, but it’s true ). The combined entity would be able to reduce operating expenses and benefit from lower client acquisition costs due to Lifestance’s referral network. This means that Lifestance would be able to not only accelerate growth by buying Talkspace, but also increase its margins - which seems to be what the market wants to see more than anything.

From a product perspective, the combined capabilities of Lifestance and Talkspace would have a compelling hybrid solution, over 550 physical centers across 33 states, over 13,000 providers (across all states), the ability to offer interventions from coaching to psychotherapy to prescribing, as well as some of Talkspace’s digital offerings like their consumer app and text therapy.

Talkspace is still not really making any money, so Lifestance would not be buying a cash-flowing, profitable asset.

Instead, this would be a purely strategic acquisition, betting that combining the two entities would lead to much greater cash generation and value creation in the future.

Testing the assumptions

When you “assume” you make and “ass” out of “u” and “me”...

Most acquisitions fail, and most of those failures are due to overly optimistic assumptions. So let’s call out the core assumptions involved in this potential deal.

1. The covered lives populations are diverse

To see the upside of this deal, Lifestance would need to know it’s not fishing in the same ponds as Talkspace. Both are large providers with significant covered lives populations, which likely have some overlap. Lifestance would need to ensure this overlap is not too significant and that acquiring Talkspace would add net new covered lives. Lifestance is only in 33 states, whilst Talkspace operates in all 50, so there is definitely some diversity here. The full extent would only be known by analysing all the payer contracts of each business.

2. The covered lives and acquisition capabilities are complementary

Another critical factor in valuing this deal is whether each company’s covered lives populations and client acquisition capabilities are complementary.

Each company has different covered lives populations (or at least, we assume they do). But they also have different abilities to acquire certain demographic groups.

The ideal scenario is that these are complementary, allowing the combined entity to activate a much higher percentage of the total covered lives population.

For example, say Lifestance holds payer contracts that cover young adults in Los Angeles, but they’ve had a hard time acquiring those clients (maybe they don’t have any clinics there). We could assume that Talkspace’s brand and digital marketing capabilities would allow them to have traction with this segment and acquire clients, activating a previously untapped segment for Lifestance.

Medicare would be a big focus here. Talkspace recently landed significant contracts for people on Medicare, but are only just rolling out their campaigns to acquire those clients. I’ve previously discussed how this may be difficult for Talkspace, considering that their brand and acquisition tactics have been traditionally focused on much younger cohorts. However, Lifestance’s network of physical clinics would likely help attract an older, Medicare population. Win-Win?

3. The combined entity will maintain low customer acquisition costs while activating new covered lives populations

One of Lifestance’s competitive advantages is their ability to acquire clients cheaply. They can do this because their referrals primarily come through their clinic network.

In 2021, Lifestance’s marketing and advertising spending was only $11.7M, less than 2% of revenue. While they haven’t disclosed much data on this spend in recent years, it is likely in a similar range.

This is far below industry averages - in 2024, Talkspace spent 27% of their revenue on sales and marketing. Lifestance would have to be able to reduce Talkspace’s marketing spend by further activating their referral network to drive demand.

4. The combined entity will be able to significantly reduce operating expenses

In my Playbook for Profitable Growth article, I explained how therapy platform businesses likely need to get operating expenses below 30% of revenue in order to have healthy net margins (i.e., 10%).

In 2024, Lifestance’s operating expenses were 34.7% of revenue, Talkspace’s were 48%. If we simply combined the two entities with no reduction in spend, the total operating expenses would be $524M (36.5% of revenue).

In the Base Case for this deal, the combined entity would have an operational efficiency of 34.7% (Lifestance’s current efficiency), requiring them to cut $25M in annual operational expenses. This would be hard, especially considering Talkspace have already leaned out their operation, but probably doable considering the substantial operational resources of Lifestance.

However, getting to 30% operational efficiency for the combined entity would require a significant reduction in costs - an additional $68M of cuts, which would be much more difficult and probably unrealistic, certainly in the near term.

What about the price?

Let’s be “asses” for a moment and assume all the assumptions come true. Would the price of Talkspace make sense for Lifestance?

My analysis would suggest that Talkspace is fairly priced and I reckon Lifestance could pick them up for $500M. If we believe in the assumptions outlined above, and the strategic rationale for buying Talkspace, then I think Talkspace is worth that price.

Let’s break it down a little.

As of today (May 2025), Talkspace are trading at $2.90 a share. Their market cap is ~$493 million, and their enterprise value is approximately $385M (they have about $120M in cash on their balance sheet) .

From a multiple perspective, this gives an EV/Revenue of ~1.98× and EV/Revenue (2025E) of ~1.6× (using the midpoint of $220–235 M guidance). These multiples are in line with where Lifestance trades today (EV/Revenue of 2.1) as well as the broader industry. They are also low relative to trading averages over the last five years.

This suggests Talkspace is at the very least fairly valued relative to its current performance and its peers. Talkspace themselves believe they are undervalued, signalled by their $7M stock repurchase in Q1 of this year.

So if $385M is a fair enterprise value, and we give a generous 30% premium on the share price in order to get the deal done, that’s a price tag of $500M.

Could Lifestance afford a $500M purchase?

Lifestance currently has a market cap of $2.4 B and an enterprise value of $2.7B.

If they were to buy Talkspace, it would be pretty much an all-stock deal. Issuing $500M of stock at a $2.4B market cap would dilute existing shareholders by about 20%. It’s possible that investors would take this deal.

They do have about $130M of cash on their balance sheet which they technically could put towards the deal, but they’re also still burning cash each month, so they would be unlikely to use any of this. Issuing new debt is another option, but they already have $275M in long-term debt obligations.

Would Talkspace take the deal?

In short, if Talkspace shareholders were offered a 30% premium to the current price, I think many of them would take it.

Unfortunately, Talkspace stock has not been good to shareholders and is still significantly below its 2020 IPO price. Their turnaround since 2023 has improved stock performance, but many investors may be quite happy to accept almost $4 for a share currently trading at $2.95.

Final Take

As I’ve outlined, this deal could make sense for a bunch of reasons. But a lot of deals that make sense on paper don’t get done. And for good reason.

Deals are hard, execution risk is real, and there are a few strategic challenges for Lifestance that Talkspace wouldn’t solve.

If they wanted to purchase a technology player, there are other, private businesses coming to the end of their runway that they could likely pick up cheaper than Talkspace and with more exciting IP and more expansive product offerings.

It also wouldn’t solve one of their biggest problems, margins.

Lifestance desperately need to raise prices for their core services, and the reason they want to get into treatments like TMS and Spravato, is to sell higher-margin services. Talkspace won’t help them in either of these pursuits.

Lifestance have just steadied their own ship, got their costs and operations under control and are finally turning a profit. They have a pathway to steady growth and will eek out margin expansion by acquiring speciality services.

While Talkspace would be a bold and tempting deal, they’re better off saving their cash (and shares) for something spicier down the line!

That’s all for this week.

As always, reach out and let me know what you think.

Keep fighting the good fight!

Steve

Founder of The Hemingway Group

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