IMS Returns to Its Senses

As previously noted in the Buysider, the proposed reverse merger of IMS Health (RX) into TriZetto (TZIX) was a strong contender for the most ill-conceived corporate finance proposal in any century, and had as much chance of getting shareholder approval as this columnist has of fitting into his tuxedo by a Memorial Day wedding. It also provided a nice little opportunity to make some easy money.

Tuesday, reality was rediscovered by both management teams and the deal was pulled. In its place was an agreement for IMS to sell its Erisco division to TriZetto for around $255 million in stock. IMS also committed to enter a business contract for TriZetto's HealthWeb (SM) product and technology services.

Extracting from the press release, Victoria R. Fash, president and CEO of IMS Health said: "This new approach retains the strategic benefits of the original transaction in a simpler form designed to be more attractive to shareholders. We are committed to the IMS Health business strategy, facilitated by our new partnership with TriZetto.'' In other words, DUH! I can't really say this is a major victory for shareholders, since the end of the silliness simply replaces the value lost since the original deal was announced, unless you have been backing up the truck over the past few weeks. (Congratulations! Now re-up your TSC subscription!)

TriZetto gets Erisco, which will provide cash flow and bulk in its efforts to sell ASP solutions to the health care industry, forgetting for the moment the issue of integrating a platform that sells to payers with one that sells to the pharmaceutical companies. That hasn't stopped Healtheon (HLTH). And without getting into a serious valuation of TriZetto, which surely would not pass this columnist's muster, the dollar value on face is about right, so we bless this aspect of the deal.

IMS conceptually will also get the benefit of TriZetto's brief experience in Web-based software offerings which will presumably help them migrate their legacy mainframe-based database into a more user-friendly Web-based offering, something that IMS needs to do.

IMS also reiterated that it will move forward with the spinoff of Strategic Technologies, which is expected to be completed this July. IMS also reiterated 15% top-line growth and 20% bottom-line growth for the core business, since the transaction.

Now comes the tricky part. IMS is a wonderful business that if managed properly could be a great long-term investment. My bet is the stock trades back into the low 20s, which was its predeal price, but still below its intrinsic value. Why? Management! That this transaction ever got past two cocktail napkins indicates, in my opinion, a dereliction of duty by Mr. Weissman and Ms. Fash -- not to mention the board's holiday away from reality.

And here's a beauty. In the IMS 10-Q released Monday, it was revealed that

The Compensation & Benefits Committee of the Board of Directors of IMS Health Incorporated (the "Company") has authorized and approved a bonus arrangement intended to reward you (Weissman and Fash) for your extraordinary efforts in negotiating the proposed strategic business combination between the Company and TriZetto or such other transaction determined by the Board, in its discretion, to be of comparable magnitude and benefit to shareholders (the "Transaction"), and to provide you with a substantial incentive to bring the Transaction to a successful completion. We believe that the Transaction will greatly strengthen the Company (combined with its Transaction partner) and confer a great benefit upon the Company's stockholders.

The "bonus arrangement" was $5.5 million a piece for Weissman and Fash. It was then noted that, "In light of the adverse market reaction to the proposed IMS Health-TriZetto merger announced on March 29, 2000, on April 2, 2000, the Chairman and the Chief Executive Officer requested IMS Health to terminate these letter agreements as of that date."

Can you say, "Conflict of interest"? Management gets paid how much already to act as stewards for the shareholder and needs this why? And why didn't the board think of this first?

So we are out of the woods for now with a reasonable outcome in the short run. It remains to be seen whether IMS will turn out to be a solid long-term investment, given mistrust between the investment community and management. It will also be very interesting to see if IMS can stay independent and aforementioned management can keep their jobs.

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