Scorched Earth Policy

AAA

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.”

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Management Buyout - MBO

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

    The combining of two or more companies, generally by offering ...
  3. Poison Pill

    A strategy used by corporations to discourage hostile takeovers. ...
  4. Sandbag

    A tactic used to hide or limit expectations of a company's or ...
  5. Saturday Night Special

    An obsolete takeover strategy where one company attempted a takeover ...
  6. Busted Takeover

    A highly leveraged corporate buyout that is contingent upon the ...
Related Articles
  1. War's Influence On Wall Street
    Bonds & Fixed Income

    War's Influence On Wall Street

  2. Mergers And Acquisitions: Understanding ...
    Fundamental Analysis

    Mergers And Acquisitions: Understanding ...

  3. What You Need To Know About Net Neutrality
    Stock Analysis

    What You Need To Know About Net Neutrality

  4. 4 History-Making Wall Street Crooks
    Personal Finance

    4 History-Making Wall Street Crooks

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center