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For

Genzyme

, the timing couldn't have been worse.

On March 6, the week the biotech market hit its all-time peak, Genzyme said it would effectively buy

Biomatrix

(BXM)

for $37 a share in cash and stock, or about $785 million. The complicated deal involved merging two of Genzyme's publicly traded units with Biomatrix, a New Jersey medical-products maker, creating a new entity,

Genzyme Biosurgery

.

Then the

Nasdaq

-- and biotechs in particular -- went south. While many biotechs, including the Genzyme units, have recovered, Biomatrix remains depressed, trading around 23 a share with a market value of about $545 million. At that level, some Genzyme investors are fuming that the 37-a-share offer is far too attractive, especially since the units,

Genzyme Tissue Repair

(GZTR)

and

Genzyme Surgical Products

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TheStreet Recommends

(GZSP)

, would also fork over $245 million in coveted cash. (Biotechs burn a lot of cash.)

Meanwhile, the companies have yet to even mail proxies to shareholders because the

Securities and Exchange Commission

is still reviewing the document -- and the deal was supposed to close this month. And the simple fact that Biomatrix's stock is trading so far below Genzyme's offer indicates that investors believe the deal will be restructured or scrapped.

"This deal may fall apart," says Jim Fiore, a fund manager with Greenwich, Conn.-based

Life Sciences Group

, which holds Genzyme unit shares. He supports the concept of the merger. "The cash component maybe should not have been so high."

No Worries

The companies insist that the deal will go through, and they're going to extreme measures to make sure it does, including attacking critics on Internet message boards.

The deal is important because it would create a firm with a large-enough market cap to attract investors that might otherwise shun small-cap stocks. And the companies could benefit from combining a range of similar products in the growing field of injectable and implanted materials used in treating joint conditions.

But clearly Biomatrix needs the merger more.

Synvisc

, Biomatrix's largest product, may be weakening. Sales fell 13% to $31.4 million in the first quarter from the previous quarter after mostly rising for two years. Company officials say uneven sales are typical of new products and call second-quarter sales "robust." But there have been

questions about Synvisc's viability for more than a year. The product is sold by

American Home Products

(AHP)

, which pays Biomatrix royalties.

The companies' problems closing this transaction illustrate the challenges faced by companies doing deals in a newly volatile biotech market -- a market driven by a vast new retail trading market with easy access to Internet message boards where information, factual or otherwise, is freely exchanged.

When Genzyme and Biomatrix struck their agreement in March, both were full of bold proclamations about what their combination would achieve. The deal would "bring substantial resources and experience to bear on several markets, with particular focus on bio-orthopedics and cardiothoracic surgery, two biosurgical areas with high growth potential," they said.

Falling Shares

But soon after, investors began dumping their biotech shares. Biomatrix fell as low as 17 by May 22, from 35 1/2 the day the deal was announced. Genzyme Tissue and Genzyme Surgical also dropped.

Biomatrix, meantime, was already waging war against its detractors, including short-sellers (investors who bet the stock will fall).

"There's an enormous short position in Biomatrix and these guys stand to get hammered if the deal goes ahead," says Michael Ehrenreich, an analyst with New York's

Techvest Equity Research

, which holds Biomatrix shares.

Biomatrix took the unusual step of seeking to silence them by suing anonymous critics in a New Jersey court. And

Yahoo!

(YHOO)

, as a result of the legal action, turned over the names of several critics. So far, Biomatrix says it's managed to expose several of the critics as former disgruntled employees, but it hasn't managed to silence them.

"It's now gone over into almost lunacy," says Duke Collier, president of Genzyme Surgical Products, who plans to run the combined company when the deal is complete. "The shorts are working very hard to keep this transaction from happening."

Genzyme, however is staying out of the legal battles for now. "We'll just get the deal done and let the dust settle," says Collier. "I suppose if they kept whacking away, we'd have to take another look at it."

Little Help

But the companies have done little to help dispel concerns. Shareholders have had precious few updates. Genzyme officials say the proxy is undergoing a "routine" SEC review, and they expect to update shareholders soon, probably this week.

But some Genzyme shareholders want at least the cash element of the deal to be renegotiated.

Genzyme "absolutely" must renegotiate the Biomatrix deal, says Peter Wen, a fund manager at

Warburg Pincus Health Sciences Fund

, which holds Genzyme unit shares. "Biomatrix has a single product, it's questionable, and they are certainly paying a lot of cash. You would expect Genzyme to know better about proper valuation."

But Genzyme officials insist the price is right. "I think the price we are paying is very fair," says Genzyme's Collier. "I don't know why shareholders would put the kibosh on it. We are buying a very valuable asset at a very reasonable price."

Shareholders in Biomatrix and all four Genzyme companies must approve the deal. Endre Balazs, Biomatrix's chief executive, and three other executive directors holding 37% of Biomatrix already have agreed to it.

Now if the companies can only convince Genzyme shareholders.