A scorched-earth policy is a last-ditch effort. It may be regarded as a final, desperate attempt to ward off the approaches of a hostile, unwanted predator in both the military and the business world.
The objective is to start operations that harm the firm, undermining its worth and earning potential in the future. Selling off valued assets, building up mountains of debt that must be returned as soon as the hostile takeover is complete, and adopting clauses that give top managers with significant payments, such as golden parachutes, if a new management team is hired, are all tactics used to achieve this goal.
No firm or its shareholders are likely to want to take such steps unless they are absolutely required. Target firms are more likely to start an alternative, less harmful anti-takeover action in order to resist a hostile offer. A poison pill with a flip-in mechanism is one example. This strategy allows shareholders other than the acquirer to purchase more stock in a firm.
By flooding the market with new shares, the purchasing firm dilutes the value of the shares it has already acquired, lowering its percentage of ownership and making control more difficult and expensive. This option, however, is not available to everyone.