(Reuters) - VanceInfo Technologies Inc and smaller rival HiSoft Technology International Ltd agreed to merge to create what they said would be the largest China-based offshore IT services provider by revenue.

Shares of VanceInfo, with a market value of $444 million as of close on Thursday, fell as much as 13 percent on the New York Stock Exchange, while those of hiSoft, with a market value of $373 million, fell 7 percent on the Nasdaq on Friday.

VanceInfo and HiSoft shareholders will each own about 50 percent of a company, valued at about $875 million under the terms of the tax-free, all-stock deal, the companies said.

"I think it is good news for Vance, it might not be good news for hiSoft," Roth Capital Partners analyst Kun Tao said.

HiSoft stock fell as its margins, which are higher currently, will come down after the merger, he said.

Tao said the value of Vance, which has a higher market capitalization, will fall due to the merger, and the stock was reacting to it.

Each VanceInfo share will be exchanged for the right to receive one hiSoft share and each American Depositary Share of VanceInfo will be exchanged for the right to receive one hiSoft ADS.

Immediately prior to the merger, hiSoft will effect a 13.9482-to-1 share consolidation and change the ratio of hiSoft ADSs representing ordinary shares from one ADS for 19 shares to one ADS for one share.

"These changes are designed to ensure that hiSoft and VanceInfo will have the same number of outstanding shares and ADSs at the effective time of the merger," the companies said.

HiSoft will be the surviving listed company, and its shares will continue to be traded on the Nasdaq.

The combined company is expected to report revenue of over $670 million for 2012, the companies said.

HiSoft's CEO Tiak Koon Loh will become the CEO of the combined company and VanceInfo's CEO Chris Chen will take on the role of non-executive chairman after the merger is completed.

The deal is expected to close in the fourth quarter.

Citigroup Global Markets Inc acted as financial adviser to VanceInfo and Lazard advised hiSoft.

VanceInfo also reported a second-quarter adjusted profit of 19 cents per share that missed analysts' estimates by 1 cent, while revenue at $94.7 million came in above expectations of $91.3 million, according to Thomson Reuters I/B/E/S.

HiSoft posted a second-quarter adjusted profit of 30 cents per ADS on revenue of $71.8 million, above analysts' estimates of 29 cents per ADS on revenue of $71.3 million.

(Reporting by Chandni Doulatramani in Bangalore; Editing by Sriraj Kalluvila)