Asset Rationalization

What Is Asset Rationalization?

Asset rationalization is the process of reorganizing a company's resources of economic value to improve operating efficiencies and boost its bottom line. 

Asset rationalization may involve many activities, including sales or divestitures of certain assets, closures of some facilities and expansion of others, and streamlining of manufacturing or other operations. In the majority of cases, asset rationalization can result in the loss of hundreds of jobs.

Understanding Asset Rationalization

Rationalization is all about making a company and the way it operates more effective. The goal is to increase operating efficiency and arrive at a peak level of performance by eliminating any waste and ensuring that the least amount of inputs are used to achieve the highest amount of output.

Asset rationalization is a common business practice. Well-managed companies periodically take stock of what they have and how they are run to determine whether any improvements can be made to become more efficient, boost sales, reduce expenses and pull in more income from revenues. Companies are ultimately judged by how much profit they generate, so it's important that opportunities to maximize the bottom line aren't squandered.

Asset rationalization paths often follow three steps. First, the company purchases a cash-flowing production asset and lowers its overall financial commitments by divesting other assets.

After that the company might look to streamline its operations by cutting costs and reducing headcount. It may then evaluate possible financing alternatives for the company's short- and long-term plans, seeking out better interest rates or borrowing costs and maybe even engaging in share consolidation by reducing the number of shares held by existing shareholders.

Advantages and Disadvantages of Asset Rationalization

Reorganizing an asset base can help to bring a company more in line with its core competencies, optimize returns, and weed out loss-making ventures. It's important that too much fat isn't trimmed, though. Efforts to aggressively cut costs and shift strategy could endanger the company, leading to hefty restructuring charges, alienated customers, and insufficient staff and resources to cater to demand.

Detractors of asset rationalization argue the strategy focuses on short-term business gains at the expense of human capital since widespread job losses will foster a sense of uncertainty and lead to lower productivity among the organization's remaining employees. However, in challenging economic times, companies may have little choice but to continue on the asset rationalization path to stay competitive in the global marketplace.

Important

Asset rationalization is particularly common during economic downturns and following mergers and acquisitions (M&A).

Examples of Asset Rationalization

In 2018, PentaNova Energy, a Canadian exploration and production energy company focused on proven Latin American oil and gas plays, dropped a bombshell. An announcement was made that the company’s board of directors, following a review of annual financial statements and ongoing commitments, charged senior management with a mandate to reduce the company's asset portfolio, and introduce significant cost reductions. Assignments were dished out to the new management to deliver on this goal and rationalize assets.

Elsewhere, in August 2016, Ruby Tuesday revealed it would close approximately 95 underperforming restaurants. The embattled chain had been struggling with falling foot traffic in shopping malls, tepid demand for bar-and-grill style eateries, and a string of unsuccessful marketing campaigns. In 2017, Atlanta-based private equity firm NRD Capital acquired the struggling restaurant chain. Due the impact from the 2020 crisis, the company filed for Chapter 11 bankruptcy on October 7, 2020. Research firm Technomic estimated Ruby Tuesday had closed 118 restaurants between 2017 and 2019.