DEFINITION of Asset Rationalization
Asset rationalization is the process of reorganizing a firm's assets to improve operating efficiencies and boost the 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 may result in the loss of hundreds of jobs.
BREAKING DOWN Asset Rationalization
Detractors of asset rationalization contend that 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. In challenging economic times, however, companies may have little choice but to continue on the asset rationalization path to stay competitive in the global marketplace.
The three steps include reorganizing the company's asset base with a focus on lowering the overall portfolio's risk profile. The first step is purchasing a cash-flowing production asset and lowering the company's overall financial commitments by divesting assets. The other two steps include streamlining the company's operations by cutting costs and reducing headcount, and evaluating possible financing alternatives for the company's short- and long-term plans, which may include share consolidation.
Asset Rationalization Examples
As an example of asset rationalization, is the recent announcement by Canadian firm PentaNova Energy Corp., a publicly traded exploration and production energy company focused on proven Latin American oil and gas plays. The company announced in April 2018 that the company's board, 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. The board gave the new management assignments to rationalize assets.
In another example of asset rationalization, restaurant chain Ruby Tuesday announced in August 2016 that it would close approximately 95 underperforming restaurants. As of May 31, 2016, Ruby Tuesday’s system included 724 restaurants, of which 646 were company-operated.