Scorched Earth Policy


DEFINITION of 'Scorched Earth Policy'

A takeover prevention strategy in which the target company seeks to make itself less attractive to hostile bidders by selling off assets, taking on high levels of debt or initiating other activities that may damage the company if it is purchased. In extreme cases, a scorched earth policy might end up being a “suicide pill.”

BREAKING DOWN 'Scorched Earth Policy'

Companies using a scorched earth policy are engaging in a last ditch effort. The policy is similar to how a retreating army may destroy crops and infrastructure to prevent their use by invaders. If the target company goes through with selling off important assets, it may wind up unable to recover if a hostile takeover falls through. Rather than sell assets or take on debt today, the company may instead enact provisions that provide senior management with substantial payouts, such as golden parachutes, if a new management team is brought on.

If a takeover is imminent, the board of directors may not be able to go through with a scorched earth policy if it is not in the best interest of shareholders. The hostile company may look for an injunction against the board’s activities, and in some jurisdictions may be able to prevent the board from stopping the takeover bid. For example, a steel company may threaten to purchase a manufacturer embroiled in lawsuits from making poor quality parts. In this case, the target company is purchasing the future liabilities associated with any lawsuit settlement.

  1. Management Buyout - MBO

    A transaction where a company’s management team purchases the ...
  2. Jonestown Defense

    A defensive strategy by which the target company engages in an ...
  3. Voting Shares

    Shares that give the stockholder the right to vote on matters ...
  4. Hostile Takeover

    The acquisition of one company (called the target company) by ...
  5. Poison Pill

    A strategy used by corporations to discourage hostile takeovers. ...
  6. Merger

    The combining of two or more companies, generally by offering ...
Related Articles
  1. Bonds & Fixed Income

    War's Influence On Wall Street

    Blitzkrieg? Dawn raids? Sounds like the markets and the battlefield have a few things in common.
  2. Fundamental Analysis

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  3. Professionals

    Hard and Soft Due Diligence: What's the Difference?

    Learn about the differences between "hard" and "soft" due diligence in a mergers and acquisitions deal (M&A) and why soft diligence is increasingly important.
  4. Stock Analysis

    How UPS Plans to Benefit from Its Coyote Acquisition

    Understand the business models of UPS and Coyote Logistics. Learn about the top four ways in which UPS will benefit from the acquisition of Coyote Logistics.
  5. Stock Analysis

    This Is What Carl Icahn's Portfolio Looks Like

    Read about some of the holdings in Carl Icahn's portfolio. Learn about his activist campaigns against companies that he believes are performing poorly.
  6. Investing News

    Office Depot and Staples Merger: What You Need to Know

    A major office-supply company merger is now in the works between Office Depot and Staples. First attempted 18 years ago, will this time be the charm?
  7. Forex Fundamentals

    How Foreign Exchange Affects Mergers and Acquisitions Deals

    Learn how foreign exchange rates can impact the flows of international merger and acquisition (M&A) transactions, and understand how deals can impact exchange rates.
  8. Stock Analysis

    4 Trends Driving M&A in the Healthcare Industry in 2015

    Learn why there has been a lot of mergers and acquisition activity among health insurers and drug companies in the health care industry in 2015.
  9. Investing News

    Anheuser (BUD) and Miller: A Beer Merger Brews

    Anheuser-Busch is attempting to acquire SABMiller. Here's a look at what a merger means for investors.
  10. Economics

    Explaining Silo Mentality

    A silo mentality occurs when certain departments in an organization do not share information or knowledge with other departments.
  1. How long does it take to execute an M&A deal?

    Even the simplest merger and acquisition (M&A) deals are challenging. It takes a lot for two previously independent enterprises ... Read Full Answer >>
  2. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>
  3. What are some common accretive transactions?

    The term "accretive" is most often used in reference to mergers and acquisitions (M&A). It refers to a transaction that ... Read Full Answer >>
  4. Are companies with high Book Value Of Equity Per Share (BVPS) takeover targets?

    Companies with high book value of equity per share (BVPS) can be good takeover targets if those companies are public and ... Read Full Answer >>
  5. What are some ways to make a distribution channel more efficient?

    While there are many ways to make a distribution channel more efficient, the three high-level ways to increase the efficiency ... Read Full Answer >>
  6. If a company offers a buyback of its shares, how do I decide whether to accept the ...

    Tender offers for share buybacks are often made at a premium to the current market price; it may be in an investor’s best ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!