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TriZetto, IMS Agree to Merge; Jittery Wall Street Dumps Both Firms' Stocks


The old economy bet big Wednesday on the new as upstart online health-services company TriZetto Group Inc. agreed to merge with drug data giant IMS Health Inc. in a stock swap valued at $4.65 billion.

The combined company, to be called TriZetto Group Inc. and based in Newport Beach, joins TriZetto's technology with the Westport, Conn., company's dominance in pharmaceutical research in an attempt to spin business-to-business e-commerce gold.

The bet seemed like a winner early in the day when the value of the transaction was pegged at $8.1 billion.

But the deal's structure and the attempt at marrying two disparate corporate cultures triggered a market reaction that made the wager look like a loser, at least for now. Investors dumped shares of both TriZetto and IMS Wednesday, sending the deal's value plummeting.

Even so, the $4.65-billion value tops the list of major mergers involving Orange County companies, surpassing last year's $3.9-billion acquisition of Avco Financial Services by Associates First Capital.

TriZetto's high-flying, volatile stock, which is the currency being used to finance the deal, does not appeal to investors who have clung to IMS for its reliability and global franchise, analysts said.

Before Wednesday's retreat, TriZetto shares had risen 545% from the company's first day on the market in October, but the price has since seesawed as low as $6.50 and as high as $91.25 a share. The company also has a balance sheet synonymous with risky Internet ventures: soaring sales matched by big losses.

IMS, by contrast, has recorded a steady string of profits, though its stock has gradually fallen 45% in the last year.

"These folks sort of don't mix at parties, if you know what I mean," said Seth Frank, an analyst at A.G. Edwards in St. Louis.

TriZetto's top executive said he anticipated that the deal would face resistance.

"We have to find a better way to communicate the underlying numbers and the strategic value of this," Chief Executive Jeffrey Margolis said. "The question is, can we effectively bring these two groups together?"

It may be an uphill battle.

The particulars of the deal had even Wall Street veterans scratching their heads.

TriZetto, technically, is buying IMS by trading 0.4655 of a share for each IMS share, but IMS shareholders will own 88% of the combined company.

In reaction to Wednesday's news, TriZetto shares plummeted 42%, giving up $24.56 to close at $33.50 a share. The market backlash also sent IMS stock down almost 25% to $16.75, a drop of $4.88 a share.

Once the deal is complete, the new company also will issue three new securities that will allow investors to track the performance of each of the units separately from the whole.

"The methodology is confusing. It's not clean," said Benjamin Rooks, an analyst at CIBC World Markets. "Clearly, the market hates it."

TriZetto, formed in 1997, has made its mark as an application services provider. It rents software to health-care plans, hospitals and medical groups, allowing them to manage their information over the Internet or on private networks.

Clients also can use the company's HealthWeb online portal to link with partners and vendors, electronically exchanging everything from patient data to test orders and benefit information.

By late last year, TriZetto had signed 85 clients, including health insurer Humana Inc., and swelled to about 300 employees. Its revenue grew more than 188% to $32.9 million last year, but it posted a net loss of $7.9 million.

Despite TriZetto's growth rate, the company's small scale and relative obscurity made some analysts call it an odd choice for IMS.

IMS, which has more than 9,000 employees, recorded $1.4 billion in revenue last year, earning $276 million.

But joining with IMS allows TriZetto to expand its software rental business to IMS' pharmacist base as well as to managed-care providers that use the larger company's software, Margolis said. "Plus it allows us to globalize the HealthWeb portal," he said.

IMS, which currently uses old-fashioned invoices to compile its market research, clearly needed an Internet partner, analysts said.

"The Internet poses challenges to IMS and the means by which they collect information on what drugs are being prescribed," Frank said. "The Internet and physicians' use of it could change and threaten their business."

By using HealthWeb, IMS could get real-time data from providers as they prescribe and dispense drugs.

IMS Chairman Robert Weissman and Chief Executive Victoria Fash will continue in those roles in the new company. Margolis will be the company's president.

Margolis said the deal would result in some IMS jobs being relocated to Newport Beach, currently home to about 20 TriZetto staffers.

The deal is scheduled to be completed in the year's third quarter, pending approval by both companies' shareholders.


TriZetto Merger

The basics on Trizetto Group Inc. and IMS Health Inc.:

TriZetto Group

Headquarters: Newport Beach

Business: Online health care applications and information

Chairman/President/CEO: Jeffrey H. Margolis

Employees: 300

Status: Public

Exchange: Nasdaq

1999 sales: $32.93 million

1999 net income: --$7.93

Purchase price: $4.65 billion in stock


IMS Health

Headquarters: Westport, Conn.

Business: Health care applications and automated sales support

President/CEO: Victoria R. Fash

Employees: 9,000

Status: Public

Exchange: NYSE

1999 sales: $1.4 billion

1999 net income: $276 million


Stock Trend

How Trazetto's stock has performed since it opened on Nasdaq in October:

Mar. $33.5

Reported by JANICE JONES DODDS/Los Angeles Times

Source: Bloomberg News

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