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. Jonestown Defense

    A defensive strategy by which the target company engages in an ...
  3. Hostile Takeover

    The acquisition of one company (called the target company) by ...
  4. Merger

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

    A strategy used by corporations to discourage hostile takeovers. ...
  6. Voting Shares

    Shares that give the stockholder the right to vote on matters ...
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. Fundamental Analysis

    Private vs Public Equity: What's Best?

    What is the better way for a company to attract investors; by making its stock available for sale to whoever wants some, or by petitioning rich people?
  4. Investing News

    Sun Pharma And Ranbaxy: An Ideal Pharma Marriage?

    The Sun Pharma merger with Ranbaxy will blend the complementary market strengths and areas of expertise of each company and create a powerful pharma force.
  5. Investing

    Facebook's Most Important Acquisitions

    Strategic acquisitions have been key to Facebook's growth and success, and the company has acquired more than 50 companies or properties since it's formation in 2004.
  6. Investing Basics

    Poison Pill

    A poison pill is a corporate maneuver put in place to try and prevent a hostile takeover. The target corporation uses this strategy to make its stock less attractive to the acquirer. This is ...
  7. Stock Analysis

    Breaking Down the Halliburton Baker Hughes Deal

    Halliburton is using a downturn to get bigger and stronger in the long term, and the company is getting Baker Hughes at a reasonable price as a result.
  8. Brokers

    Key Differences Between M&A Advisors And Business Brokers

    For a buy, sale or partnership for one's business, one needs brokers and advisors to proceed ahead. Here are the key differences between business brokers and M&A advisors.
  9. Professionals

    What is a SWOT Analysis?

    SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. SWOT analysis is a management tool used to identify strategies for success. It may be used to guide individual thinking, group ...
  10. Trading Strategies

    Selecting Mergers & Acquisitions Advisories For Small Businesses

    Mergers and acquisitions advisories aren't just for big players. Many advisory firms cater to small and medium businesses.

You May Also Like

Hot Definitions
  1. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  2. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  3. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  6. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
Trading Center