Today’s companies are developing new ways to rationalize assets for sustainable growth. Major players are still divesting, but they are also buying assets, streamlining operations, changing business models, and entering into partnerships to help optimize their portfolio value. In many ways, these companies are using rationalization from a position of strength and not distress by exploring all options and keeping in mind the long-term business goals of the company.
Although rationalization is sometimes considered only in terms of divestiture, the process should always be about delivering optimal value to the portfolio. Management should consider and assess the five options available to deliver value — sell existing assets, buy a new asset, concentrate asset productivity by streamlining operations, close the business, or enter into partnerships, alliances or joint ventures with distributors, suppliers or other business entities.
Asking the following questions can help management choose the right options that will maintain their strategic direction during the rationalizing process.
Too many companies develop deep, historical attachments to legacy assets and postpone divestitures despite the fact that holding onto such assets can limit performance, increase management time, add complexity and erode differentiation. An objective assessment supported by data and analysis to test the planned course of action with the company’s strategic direction is required to accurately determine the best owner.
Is the market attractive on multiple levels? Does it support strong growth, attractive margins and other business advantages? Are any significant market changes expected? An analysis of future market development should be a part of any portfolio rationalization evaluation.
Often, the skill set, time and effort required to support a transaction is underestimated. Transaction issues involving IT integration, for example, can add a new and unforeseen level of complexity for businesses.
By determining upfront the best use of proceeds, the rationalization can maximize value for the group. Proceeds might be distributed to shareholders, or they might be used to drive growth through new investments, increasing research and development (R&D) and introducing new products.
The impact of the rationalization needs to be understood in terms of one, three or even five years in the future.
Sometimes a combination of options such as transactions, partnerships or joint ventures can help introduce synergies, increase supply chain efficiencies or enable companies to enter new markets. For example, GlaxoSmithKline (GSK) and Novartis recently announced a three-part transaction that involves an asset-swap between the two companies to create a new consumer healthcare business.1
We believe that portfolio rationalization is a powerful tool for optimizing portfolio value. As such, we think reviews should be performed on a regular basis, factoring in recent shifts in the business landscape, regulatory developments, actions by competitors and adjustments in company business goals and requirements. Combined with other strategies, rationalization will help companies maintain a competitive advantage in today’s markets.