A Presentation on Liquidation,

Divestment and Turnaround

Presented By;
AHEL VITSU
NU/MN-02/11
Contents
Introduction
Divestment
Liquidation
Turnaround
Conclusion
 Introduction
Many Companies, during different phases of organizational life cycles,
reach a stage when organizational change becomes essential for survival and
growth.
Organizations have to adopt appropriate strategies for managing such
changes. The strategies in order to manage the changes effectively can be
divided broadly as;
1. Reactive: Which includes Corporate Restructuring Strategy, Divestment
Strategy, Liquidation Strategy and Corporate Turnaround Strategy, and
2. Proactive: Which includes Managing Radical change, Managing
Uncertainty, Doomsday Management and Change during Good Times
 Divestment
Divestment also called divestiture, means selling a part of a company- a
major division or an SBU. Divestment can be part of an overall downsizing or
retrenchment strategy of an organization to get rid of businesses which are
unprofitable or which require too much capital or which do not fit well with the
company’s other existing businesses or activities. Divestment is many a time used
to raise capital for new acquisitions or investment.

Divestment can be done in two ways:

1. Selling a business outright
2. Spinning it off as an independent company.
 Divestments can take place for various reasons, or in other words, divestments are
recommended under certain situations. The important reasons/ situations are:
1. An SBU requires more resources to be competitive than the company can provide.
2. Divestment may be done because divesting the business or part of the company
may be the only way for the company to survive.
3. A business has become unprofitable because of continuing competition.
4. A company has pursued a turnaround strategy for a business but failed to achieve
required improvements.
5. A business is currently profitable, but environmental change may make it
unprofitable; so, it is wise to make a profitable exit.
6. A product may require technological upgradation, but the cost-benefits or returns
may not justify such an investment.
7. A business has become a mismatch with other core businesses of the company.
8. Government Regulations like MRTP Act require a business to be divested because
of oversize of the organization.
 Liquidation
Liquidation means closing down a company and selling its assets. Liquidation
can also be defined as “selling of a company’s assets, in parts, for their tangible
worth”.
Liquidation may be the toughest decision for a company, but, if it is
unavoidable or inevitable, it should be done at the right time and, in a planned
manner. Planned liquidation involves a systematic process for maximum benefits
for the company and its shareholders.
In India, liquidation is governed by the Companies Act, 1956, where
liquidation is officially termed as ‘winding up’. The Act defines winding up of a
company as ‘the process whereby its life is ended and its property administered for
the benefit of its creditors and members’.
 According to the Act, liquidation or winding up may be done in three ways;
• Voluntary winding up
• Voluntary winding up under supervision of the court
• Compulsory winding up under an order of the court

Under certain situations, liquidation is particularly recommended. David (2003)

has suggested three situational guidelines for liquidation to be an effective strategy.
1) An organization has pursued both a retrenchment strategy and a divestment
strategy, but, neither has been successful.
2) For an organization, only alternative left is bankruptcy; liquidation, in this case,
represents an orderly and planned means of obtaining maximum possible cash
for the organization’s assets. A company can legally declare bankruptcy and then
liquidate various divisions or businesses to raise funds or capital.
3) The stockholders of a company can minimize their losses by selling the
company’s assets through liquidation.
 Turnaround
Corporate Turnaround may be defined as organizational recovery from
business decline or crisis. Business decline for a company means continuous
fall in turnover or revenue, eroding profit, or accrual or accumulation of losses.
Turnaround strategies are usually required for crisis situations.

Major situations which signals towards the need for a turnaround strategy are;
1) Steadily declining market share
2) Continuous negative cash flow
3) Negative Profit or accumulating losses
4) Accumulation of debt
5) Falling share price in a steady market
6) Mismanagement or low morale
 Generally, there are two methods of Corporate Turnaround strategy;
Surgical and Non-Surgical Turnaround.
• Surgical Turnaround method is more commonly practiced in the west. It
involves sweeping changes like firing of staff, managers, wholesale reshuffling
of portfolios, closing down operations etc. Some call it bloodshed or
bloodbath.
• Non-Surgical Turnaround Method adopts the opposite approach, i.e.
peaceful means- revamping or recovery through meetings, discussions,
persuasions, consensus etc.
 Conclusion
A company can react effectively to the changes taking place in its
environment by choosing the best alternative fit for the situation it is in. For eg//
a company can either adopt the liquidation strategy if it incurs continuous loss
which is not recovered by the other strategies such as divestment or turnaround.
A company can also adopt proactive strategies so as to avoid any uncertainties in
future.
References
Strategic Management; by A Nag
Strategic Management (Sixth Edition); by J. David
Hunger and Thomas L. Wheelen