Is An OnDeck Acquisition On Deck?

When OnDeck completed its IPO in 2009, it entered the public markets with a massive amount of buzz, ending the day with a share price north of $20 dollars and a valuation around $1.9 billion.

“We’ve been operating with the discipline of a public business,” noted OnDeck CEO Noah Breslow shortly after the IPO was completed, adding that OnDeck will double down on small business lending rather than diversifying into consumer, auto, or other types of lending, and calling OnDeck’s small business credit scoring system “our core competency.”

OnDeck was part of a class of marketplace lenders carried into the public markets with big IPOs and great expectations for disrupting the future of SMB and small consumer lending.  The expectation, even among their competitors — in fact, especially among their competitors — was that OnDeck and its ilk were coming to eat traditional banking’s lunch.

Two years out, and the banks’ lunch remains uneaten — because those alternative lenders like OnDeck have had a rather bumpy two years.  OnDeck’s share price is down 75 percent since its 2014 IPO — in the last 12 months the firm has shed 37 percent of its value.

Today OnDeck’s market cap stands at $330 million.

Some of OnDeck’s troubles are outside of its own making.  The explosion at LendingClub almost a year ago took a bite out of marketplace lenders in general as investors suddenly felt a good deal less confident about the “can’t lose” investment strategy that P2P lending had previously seemed to offer.

But OnDeck also saw packages of loans it sold show up with higher than expected default rates — and criticisms were leveled in particular at the firm’s business scoring model as being less accurate than advertised.  Charge-off rates, incidentally, have leveled off in the last six months — and the firm has pledged to tighten its lending standards.

However, it seems that more fundamental changes may be coming soon to OnDeck — rumors of an acquisition that began swirling a few weeks ago are becoming more pronounced as activist investors on OnDeck’s board are starting to push — aggressively — for a big change of direction, particularly a sale.  As of this this week, that push is getting louder and more public.

The Kabbage Rumor

OnDeck’s status as an acquisition target first popped into the news cycle as a rumor that rival SMB alt-lender Kabbage might be considering buying OnDeck.  Kabbage is Atlanta-based and not primarily a marketplace lender — though in March, Kabbage announced it had priced the largest asset-backed securitization of small business loans in the online lending industry, worth about $525 million.

Most analysts who reviewed the deal noted that such an acquisition was unlikely — since even at its greatly reduced price, Kabbage doesn’t quite have the capital to make the deal happen.

But, market watchers were interested in the test balloon aspect of the rumor — and whether it were possible that the release of the Kabbage name might draw more potentially interested parties to the table.

Because it seems that at least some of OnDeck’s more zealous investors would very much like to talk with those interested parties.

Activist Investor Push

Marathon Partners Equity Management, LLC has owned 1.75 percent of OnDeck since the end of 2016 — and the activist investor is now pushing for a new direction, preferably one that involves a sale.

“We believe OnDeck’s platform ultimately needs to be in the hands of a larger, more secure owner in order to reach its full potential. Given all of the risks inherent in this business, an independent OnDeck may simply be too risky of a strategy for the board to pursue, especially with the burden of covering approximately $200 million of operating expenses annually just to break even,” wrote Mario Cibelli, a managing partner at Marathon, in a letter to OnDeck’s board in mid-March.

“The market values OnDeck as a subscale commercial lender with no technology advantage or domain expertise, even as the Company’s cost structure remains elevated and resembles that of a prized technology concern,” the letter also noted.

That letter apparently did not get quiet enough of a reaction from the board — OnDeck’s official response was that they “value dialog with their shareholders,” and so as of the end of last week, the campaign ramped up.

Cibelli publicly released his letter to OnDeck’s board — and began encouraging shareholders to join him in voting against re-electing three board members at the online small-business lender’s annual meeting next month. Up for re-election are Noah Breslow, OnDeck’s CEO; Jane Thompson, a former financial-services executive at Walmart and Ron Verni, a former CEO of Sage Software.

“I haven’t sensed an urgency for change,” said Cibelli in an interview with The Wall Street Journal. “We would encourage other shareholders to consider supporting our vote to send a strong signal to the board and management team.”

Whether or not very drastic changes are coming soon to OnDeck remains to be seen — the annual meeting for shareholders will likely be spirited.  But it seems, one way or the other, that if OnDeck’s board lacked a sense of urgency before now — it is safe to assume they are about to discover one.