Dec. 7 (Bloomberg) -- Macrovision Corp., the maker of software to prevent movie piracy, dropped the most in six years in Nasdaq trading after agreeing to pay $2.8 billion, more than double its market value, for Gemstar-TV Guide International Inc.

Investors questioned Macrovision's strategy and its ability to finance the stock and cash transaction, said Mark Argento, an analyst at Minneapolis-based Craig-Hallum Capital Group. Gemstar, the provider of interactive program listings co-owned by Rupert Murdoch's News Corp., had its biggest decline since May 2004 on the Nasdaq Stock Market.

Macrovision ``does not have the liquidity of a larger acquirer,'' and Gemstar investors were expecting an all-cash deal, said Argento, who doesn't own Gemstar stock. ``The Street obviously thinks there's more risk than reward.''

The purchase of Los Angeles-based Gemstar gives Macrovision a company that was News Corp. Chairman Murdoch's worst investment, resulting in almost $6 billion of writedowns in fiscal 2002. Macrovision Chief Executive Officer Fred Amoroso wants Gemstar to offer copyright-protected libraries of shows, movies and music on TVs, mobile phones and the Internet.

``I recognize this is a complex transaction, no kidding,'' Amoroso said on a conference call today. ``We haven't looked at this as what the immediate first day reaction will be.''

Stocks Tumble

The company will take on as much as $800 million in additional debt to finance the purchase, and will inherit the TV Guide print magazine, cable networks and a horse-racing business. Gemstar shareholders will get $6.35 in cash for each share, or Macrovision stock at a ratio of 0.2548, Santa Clara, California- based Macrovision said today in a statement.

Macrovision dropped $5.55, or 21 percent, to $20.44 at 4:30 p.m. New York time. Gemstar fell 99 cents, or 17 percent, to $4.99. The cash offer is 6.2 percent higher than Gemstar's closing price of $5.98 yesterday, and the stock portion is 11 percent more.

Gemstar CEO Richard Battista, who put the company up for sale in July at the behest of News Corp., will leave after the closing. Gemstar's customers include Comcast Corp. and Time Warner Cable Inc., the two-biggest U.S. cable-TV providers. Analysts had named Comcast as a potential buyer.

`A Debacle'

With the sale of its 41 percent stake in Gemstar, News Corp. can focus on its Internet strategy and the purchase of Dow Jones & Co. Murdoch, 76, misread the market for interactive TV and the strength of Gemstar's patents, Larry Haverty, portfolio manager at Mario Gabelli's Gamco Investors Inc., said before the announcement.

``Gemstar was pretty much an embarrassment and a debacle,'' Haverty said.

Gemstar lost $7.78 billion between 2000 and 2004 as advertisers spurned the guide, legal efforts to enforce patents faltered and former CEO Henry Yuen was sued for allegedly overstating sales.

Yuen and former chief financial officer Elsie Leung were sued by the U.S. Securities and Exchange Commission, which said Gemstar exaggerated sales by $248 million from 1999 to 2002.

Leung settled in February 2006, while a judge ordered Yuen to pay $22.3 million in fines and restitution three months later. Gemstar also wrote down the value of 200 patents after losing court challenges, leading to a $6 billion loss at News Corp.

Macrovision will spend the next few months learning about Gemstar's businesses before making any decisions on possible asset sales, Amoroso said today. Gemstar and Macrovision share a vision for delivering digital home entertainment to consumers, said Battista, who took over three years ago.

Internet Focus

Gemstar supplies onscreen listings to cable-television operators and is the publisher of TV Guide magazine. The company reported third-quarter net income of $123.2 million, up from $17.5 million a year earlier because of a tax gain.

The combined company will target annual revenue growth of 10 percent to 15 percent, according to a regulatory filing. The margin on earnings before interest, taxes, depreciation and amortization, will be 40 percent, Macrovision said.

Shareholders of Macrovision will own 53 percent of the combined company, and the cash portion of the deal will not exceed about $1.55 billion. The company has arranged a $650 million loan to help finance the transaction.

Macrovisions's Amoroso and James Budge will hold their current roles of CEO and chief financial officer at the combined company.

The transaction has been unanimously approved by the boards of both companies and is scheduled to be closed early in the second quarter of 2008.

JPMorgan Chase & Co. advised Macrovision and UBS Investment Bank advised Gemstar in the transaction.

To contact the reporter on this story: Sarah Rabil in New York at srabil@bloomberg.net

Last Updated: December 7, 2007 16:53 EST