Scorched earth policy

Scorched earth policy,

Definition of Scorched earth policy:

  1. A scorched earth policy is a strategy to prevent a takeover in which the target company seeks to make itself less attractive to hostile bidders. Tactics include selling off assets, taking on high levels of debt, and 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.”.

  2. Defense maneuver against hostile takeover attempt designed to make the target firm unattractive, such as by selling off its most valuable assets and/or scheduling its entire debt to become due upon a merger. It takes its name from the Chinese guerilla warfare tactic (called jiaotu or zhèngcè) of burning or destroying everything that might be of any use to an invading enemy.

  3. The term has a military origin and describes a strategy in which a retreating army destroys crops and infrastructure to prevent their use by their attackers. Companies using a scorched earth policy are engaging in a last-ditch effort, and if the target company goes through with selling off important assets, it may wind up unable to recover if a hostile takeover falls through. As an alternative to selling assets or taking on debt, a company may instead enact provisions that provide senior management with substantial payouts, such as golden parachutes, if a new management team is brought on.

Meaning of Scorched earth policy & Scorched earth policy Definition