Updated from 12:00 p.m. EST

IMS Health

(RX)

, the biotechnology and health care market researcher, said Tuesday that it would merge with

TriZetto

(TZIX)

, a provider of medical management software services, in a complex deal that sent shares of both companies falling Wednesday.

Although IMS shareholders will control the combined company, TriZetto will use its high-flying stock -- which had risen more than 500% since its initial public offering in October -- to acquire IMS.

Shares of TriZetto plunged 24 9/16, or 42%, to close at 33 1/2 Wednesday. The selloff in TriZetto pulled IMS' stock down 5 1/8, or 24%, to close at 16 1/2.

Analysts and money managers said company officials could not adequately explain how the disparate businesses would benefit one another, raising concerns that TriZetto might simply burn through IMS's cash with no clear goal in mind.

The companies said that based on Tuesday's closing prices, the deal valued IMS at $27.03 a share, or $8.2 billion total, a 25% premium over IMS Health's stock price Tuesday. But at the close of trading Wednesday, the deal was worth only $15.59 a share for IMS shareholders, or about $4.6 billion total.

IMS, based in Westport, Conn., is best known for its pharmaceutical market research, including tracking drugs down to the level of the number of prescriptions written by a given doctor. Virtually every big pharmaceutical company and many biotechnology companies are clients, and the research produces more than $1 billion, or around 98%, of the company's annual revenues, according to Wall Street analysts and IMS's chairman Robert E. Weissman.

The 40-year-old business also owns

Erisco Technologies

, which develops administrative and analytical software for managed care companies, as well as a 61% stake in

Cognizant Technologies

,

(CTSH) - Get Report

a nonhealth care consulting business. Weissman said the company plans to sell the Cognizant stake.

TriZetto Group, based in Newport Beach, Calif., is an application service provider and a competitor to

Healtheon/WebMD

(HLTH)

. The company maintains electronically accessible databases used by administrators in doctors' offices to coordinate billing and scheduling. The company also operates

HealthWeb

, a fledging Internet portal intended to link doctors' offices with laboratories, managed care companies and insurers.

Under the terms of the deal, already approved by the boards of directors of both companies, IMS shareholders would receive 0.4655 share of TriZetto for each IMS share.

With TriZetto as the legal acquirer, the transaction will be accounted for as a purchase and is expected to be tax free to the shareholders of both companies, the companies said.

Upon completion of the merger, the new company plans to issue three securities to all investors, the companies said. First, IMS, trading on the

New York Stock Exchange

and representing the core IMS pharmaceutical market research and sales management businesses, will be issued as a tracking stock. Second, application services provider and Internet portal business TriZetto, trading on

Nasdaq

, will be combined with

Erisco

, a health care technology solutions provider. Third, a new security,

Strategic Technologies

, a pharmaceutical relationship management company, will be structured as a tax-free spinoff.

Current shareholders of both IMS and TriZetto will ultimately own three securities: IMS, TriZetto and Strategic Technologies. That complication, among others, unnerved investors.

"The reason you buy IMS is its cash flow characteristics, its stability" said Stephen Denelsky, analyst for Credit Suisse First Boston, referring to the stock. "It doesn't trade at Internet multiples. You attract a fundamentally different type of investor."

Denelsky had rated IMS shares buy until the deal was announced, but he is now reconsidering his rating. He does not cover TriZetto, and his firm has done no underwriting for either company.

The deal marks a huge gamble for IMS, and one investor who questioned the company's management said the merger confirms fears that the company is poorly run.

"We can't really see the benefits of the combined structure," said Antony Gifford, portfolio manager for Fleming Asset Management, New York, which owned 1.8 million shares of IMS, or a 0.5941% stake, as of Dec. 31, according to filings with the

Securities and Exchange Commission

. "The company hasn't been able to produce any financial data at all; to say they won't have any for three weeks makes you wonder why not. The impression is that they don't quite know themselves. That's not reassuring."

The company plans to present a complete package of numbers to investors in "a couple of weeks," Weissman, the IMS chairman, said in an interview Wednesday.

"We have not completed the communication," Weissman said. "You have the limitations of a press release and an hour and 15 minutes. It is not a simple story. We believe that what we're putting together will be unique in the marketplace."

He added that the company has built a reputation with investors by providing accurate guidance to analysts. "We won't speculate on guidance, we won't get facile with the numbers. On a day like today, boy there's a part of you that says 'I want to do that.' "

The company was forced to announce the deal before it had completed analyzing the financial implications because lawyers familiar with the arrangement told executives word could easily leak out that they had reached a meeting of the minds.

"Everybody has a friend; not only the bankers but the lawyers," Weismann said. "You can't come to a deal without talking about it."

Despite the initial Wall Street reaction, Weissman said the companies would benefit one another in ways investors would soon understand. In essence, he said, Trizetto's ability to gather information about doctors and deliver services and information to them will mix well with IMS's information gathering services in the pharmaceutical industry.

Together, the businesses can "help the pharmaceuticals sell drugs, help the payer community determine where drugs are most efficacious," he said. They can also, "as a not inconsequential side effect, improve the quality of health care."

The deal is expected to be completed in the third quarter of 2000, subject to regulatory approvals, approval by the shareholders of both companies and customary closing conditions.