Online Hookup

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Sometimes, it pays to think small. That's why our Hidden Gems newsletter seeks out promising upstarts before they are discovered by the mainstream. What works for shareholders can work just as well for corporate investors.

On Friday, InfoSpace (Nasdaq: INSP) announced that it would acquire local search specialist Switchboard (Nasdaq: SWBD) for $7.75 a share in cash. If the latter sounds familiar, it may because we singled it out last month, when the stock was below $6, in our Five Stocks Under $10 feature. While the 30% premium is appreciated, the deal is still a bargain. In fact, InfoSpace will only need to put up about $5 a share beyond the cash sitting on Switchboard's balance sheet to complete the transaction.

InfoSpace hasn't been much of a slouch, either. Ten months ago, we wrote favorably about the company's value despite its shaky fundamentals. Its market cap at the time consisted mostly of its cash balance. We argued that it was a diamond in the rough at those levels. The stock returned the favor by tripling in value.

While not as prolific as, say, Yahoo! (Nasdaq: YHOO) or Google, InfoSpace and Switchboard are serving a compelling search market. Entrepreneurs and small businesses realize the advantage of online performance-based marketing that can be tailored to any budget and targeted far more effectively than print or television ads. The Internet is fashionable again.

The dot-com crash cleaned out the pretenders and erected formidable barriers to entry. Now, these are good times for producers of online content and portal services. Will it take Google going public to confirm this trend? Perhaps. In the meantime, it pays to think small.

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Longtime Fool contributor Rick Munarriz spends way too much time on Google. He does not own shares in any companies mentioned in this story.