The merger of HLTH Corp. and WebMD Health Corp. could make the combined company a target for larger Internet companies such as Google Inc., industry observers said Thursday.

HLTH Corp., of Elmwood Park, N.J., announced Thursday that it would merge into its 84%-owned subsidiary, WebMD, in a $2.3 billion deal. Under terms of the transaction, each outstanding share of HLTH common stock will be converted into 0.1979 shares of WebMD common stock and $6.89 in cash. The deal, which values each HLTH share at $12.63, a 26% premium to Wednesday's closing price on the Nasdaq Stock Market, will eliminate both the controlling class of WebMD stock held by HLTH and WebMD's existing dual-class stock structure.

"It's still modest relative to what those actual properties could fetch but one thing that existing HLTH shareholders have to consider is things are cleared for a potential takeout," said Anthony Petrone, medical technology analyst at Maxim Group LLC in New York.

Petrone said other potential buyers for the combined entity could be Microsoft Corp. and Yahoo! Inc. (Microsoft recently offered $45 billion for Yahoo!, though that offer has not been accepted). Google may be the most likely buyer since it has been testing its long-awaited health service, where it will store medical records online, allow people to build online health profiles and share selected information with family or caregivers. But Microsoft last October introduced a similar service called HealthVault, where it is partnering with the Mayo Clinic and others, and AOL co-founder Steve Case is backing Revolution Health Group LLC, which provides online tools for personal health histories.

Investors are also hoping the deal bolsters the share price of the merged company. Shares of HLTH Corp. dropped by almost 34% this past year, while shares of WebMD plummeted by almost 46%.  Shares of HLTH rose by more than $2, or 20%, in late-day trading Thursday, to $12. Shares of New York-based WebMD traded up by about 45 cents to $29.43.

HLTH said the merger will reduce WebMD's share count by 20%, eliminate HLTH's controlling interest in the company, and will capitalize WebMD with about $700 million in cash and investments. Upon completion of the deal, HLTH stockholders will own about 80% of WebMD. About 45 million shares of WebMD common stock will be outstanding following the closing of the merger.

Shareholders at both companies still must approve the deal. HLTH, which owns shares of WebMD constituting about 96% of the total number of votes represented by outstanding shares, has agreed to vote in favor of the merger. The deal is expected to close in the second or third quarter this year.

The transaction will be funded from cash and investments at both companies, along with proceeds from HLTH's anticipated sales of its ViPS and Porex businesses. HLTH said it has received "significant interest" from potential buyers.  HLTH already sold its 48% interest in medical claims processor Emdeon Business Services to General Atlantic LLC and Hellman & Friedman LLC for $575 million in cash.

The senior management team of WebMD will continue to lead the combined company, under president and CEO Wayne Gattinella. Neither company could be reached for comment.

Petrone said the deal will leave existing WebMD shareholders well capitalized and gets rid of the dual-voting Class A and Class B structure used at the companies, which should help streamline the "decision-making process on all matters going forward, which could include evaluating potential take-out offers from outside parties," he said in a Thursday report. The deal will also give WebMD shareholders greater exposure to the underlying growth within healthcare advertising, he said.

Analysts expressed little concern over the $195 million of investments HLTH  has in certain auction rate securities, which under terms of the deal must be liquidated by the company prior to closing of the merger. The ARS investments owned by HLTH are backed by student loans, 97% of which are guaranteed under the Federal Family Education Loan Program.

"HLTH Corp. may need to write down a small portion of the ARS, but the entire $195 million is certainly not at risk," wrote James Kumpel, an analyst at Friedman, Billings, Ramsey & Co. He  added that the merger was a long time in the making and that WebMD "is finally the streamlined online health portal that so many people have had in mind from the get-go."

He said some industry obsevers have speculated that a Yahoo! "bid for WebMD would be a poison pill or defensive maneuver to try to evade Microsoft." WebMD and Yahoo! currently partner in the sharing of healthcare informaiton.

"Now you have a single entity with a big balance sheet and a very streamlined focus business model as opposed to scattershot," Kumpel said about WebMD. "Clearly the leader in usage and mindshare and pricing, frankly, in terms of online ads for healthcare information seekers, is WebMD, so they are very attractive on their own terms."

WebMD was spun off from HLTH in September 2005 in a 6.9 million share offering priced at $17.50.

Citigroup Global Capital Markets Inc. analyst Mark Mahaney wrote that  WebMD has healthy investment characteristic.  It participates in an attractive Internet segment--health-related online marketing; it's a leader in the consumer and professional health segments, whether measured by Web traffic, revenue or brand strength; and "its fundamentals, especially its margins, are very strong." -- Cheryl Meyer