Following a media report saying that the online small business lender Kabbage is in talks to raise funds, FBR Capital analyst Bob Ramsey argued that it could be used for a potential acquisition, with On Deck Capital (ONDK) among the possible targets.

KABBAGE RAISING FUNDS: According to a report by Reuters, privately held online lender Kabbage is seeking to raise funds to use for potential acquisitions. The company, which is seeking to raise a "few hundred million dollars" in equity funding, is considering On Deck Capital as a possible target, one source told the publication.

ON DECK SEEN AS 'VULNERABLE': Commenting on the news, FBR Capital's Ramsey told investors that the "significant drop" in On Deck's market cap over the past two years makes it "vulnerable," while the disparity between private and public company valuations means that private buyers may have the currency to make a deal work. Moreover, while the analyst is not convinced that On Deck is for sale, he believes that its proprietary database of over 10M small businesses, ability to work with the biggest banks, proprietary underwriting model, and potential cost savings would all be worth considerably more than the company's current market cap in a sale to the right buyer. There could reasonably be some amount of cost savings by merging the businesses given the similarities between Kabbage and On Deck, as both offer online term loans and lines of credit to small business borrowers, both are founding members of the Innovative Lending Platform Association trade association, and both have a largely domestic business with some international expansion, with a growing focus on building bank partnerships. While Ramsey acknowledges that he has limited knowledge about Kabbage because it is a private company, the analyst highlighted that cultural issues are always difficult in mergers, which could be complicated by the fact that On Deck is bigger than Kabbage by some measures.

WHAT'S NOTABLE: On Monday, On Deck's competitor Prosper Marketplace filed its 10-K annual report Monday, showing a loss of $118.7M for the year on revenues of $132.9M, as compared to a loss of about $26M on revenues of $200.8M in 2015. The privately held company pinned the loss for 2016 on reduced investor demand for its loan packages.

PRICE ACTION: In late morning trading, shares of On Deck have gained over 9% to $4.90, while publicly-traded peer LendingClub (LC) has advanced about 2% to $5.30.