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Que paso Quepasa?

What happened with Quepasa Corporation (QPSA), the online social networking site for the Latin community? Trading in the once sleepy stock has come alive since the beginning of 2011. Now a plan to merge with Insider Guides, Inc, the owners of MyYearbook.com, gives investors a reason to bid up the stock…or not.

In the first day of trading several stock market pundits weighed in on the deal announced yesterday, including an article in the Wall Street Journal that was published an hour before the company’s announcement hit the wire. Most commentators tapped out a few quick comments focusing on the combined revenue of the two operations. Indeed, the deal would transform Quepasa’s size in revenue terms from a puny $8 million in annual sales to approximately $34 million.

If this is a story about combined revenue alone, investors might as well say “hasta luego.”

Quepasa CEO John Abbott clearly thinks there is more to the deal. During an early morning conference call with investors, Abbott was effusive as he described the merits of combining Quepasa’s proprietary social gaming with the innovative approach of MyYearbook.com to social networking.

MyYearbook.com has accomplished what has so far eluded Quepasa - the cultivation of voluminous traffic. MyYearbook.com boasts over one billion page views on mobile platforms and 1.2 billion page views on the web each month. According to comScore, it is the top site for teen searches in the U.S. The top spot was earned through a unique emphasis on social discovery, i.e. teens meeting new people rather than just pinging friends already in their circle. A rich look and feel on mobile devices has also helped MyYearbook.com with young people who are more likely to login from their cell phones.

The problem is that monetizing teen and young adult traffic is easier said than done. Not that the MyYearbook.com track record has been so bad. The company earned $4.9 million before interest and taxes on $23.7 million in revenue in the last year. Abbott and his new friends at MyYearbook, think the numbers could go substantially higher by making Quepasa’s social game platform available to MyYearbook.com users. There may also be some revenue-generating synergy between MyYearbook.com’s social theater product and Quepasa’s social contests.

The MyYearbook.com deal also adds some sizzle to Quepasa’s offering that had been missing. The Latin social networking space is crowded. Each of the major search players has a Spanish language alternative, including MySpace Latino, Yahoo! Español (YHOO: Nasdaq), American Online Latin America, and Google’s (GOOG) Orkut.com. Additionally, Spain’s Telefonica (TEF: NYSE) operates Tuenti.com and digital media operator Terra Network S.A. offers Terra.com.

Joining forces with Quepasa opens the door for MyYearbook.com to access the public capital market to support its fast growth. Most of the social networking players are larger and better capitalized. Their product development organizations are deep, particularly in the social game arena. Tough competition gives Quepasa and MyYearbook.com a good reason to team up for mutual support.

The real question about Quepasa may not be “what happened?” but “what price?” Abbott and friends made a good pitch for the promise of synergy between the two companies. Is it enough to justify the $100 million price tag Quepasa is paying for MyYearbook.com? In addition to $18 million in cash, Quepasa is issuing $82 million in new shares to pay for the deal. At the closing price before the merger was announced the implied stock issuance was 8.3 million shares. There is a not-so-subtle hint of dilution for QPSA owners.

Investors apparently need time to consider the deal. In the first day of trading the stock closed up four pennies, suggesting a wait and see attitude. Absent a widespread revolt by shareholders, Abbott and MyYearbook.com leadership will have a chance to pitch the deal merits in the months leading up to the expected closing near the end of 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Investors Adopt 'Wait and See' Attitude on Quepasa's Planned Merger