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This past weekend, the Motley Fool Money radio show featured best-selling author Jim Collins. Knowing that he was going to be a guest, I went to my bookshelf and dusted off a copy of one of my favorite Collins books: How the Mighty Fall. The book details the five stages of decline that once-great companies go through during their fall from grace.
On Monday, I detailed Stage 1: hubris born of success. Tuesday was dedicated to Stage 2: the undisciplined pursuit of more. And most recently, I took on a whole industry that's going through denial. Today, we'll be dealing with stage four, and the company in my crosshairs today: Hewlett-Packard (NYSE: HPQ ) .
Stage 4: grasping for salvation.
At the end of each chapter, Collins quickly summarizes the key symptoms to diagnose whether a company is in a certain stage of decline. Instead of listing all the symptoms, I'm going to zero in on a few that HP is most guilty of.
Symptom No. 1: a series silver bullets
Just this past month, fellow Fool Morgan Housel pointed out that if HP's share price remained depressed, "the company would repurchase its entire market cap within the next decade." Not bad if you're a shareholder -- that would create some serious value.
But instead of following this wealth-creating path, the company cancelled its repurchase program and paid $10 billion in cash to acquire U.K. software company Autonomy. That cash represents a whopping 20% of HP's market cap, yet the acquisition will contribute only 0.7% to HP's revenue and 2.7% to it's earnings.
Symptom No. 2: grasping for a leader-as-savior
First, HP canned Mark Hurd as CEO and then allowed him to go to rival Oracle (Nasdaq: ORCL ) , all while paying him a $35 million severance package. At the time, Oracle CEO Larry Ellison quipped, "The HP board just made the worst personnel decision since the idiots on the [Apple (Nasdaq: AAPL ) board fired Steve Jobs many years ago."
In Hurd's stead, the company hired Leo Apotheker away from German SAP (Nasdaq: SAP ) . Apotheker lasted one week short of a year. During his tenure, the company lost about half of its market cap, yet the company's parting gift for Apotheker settles in at a cool $13.2 million.
Only time will tell how former eBay (Nasdaq: EBAY ) CEO Meg Whitman will do after taking over for HP. One thing is for sure, though: History is not on the side of companies grasping for a savior.
Symptom No. 3: panic and haste
Back in 2010, the hire of Apotheker surprised many. After doing a little digging, Morgan Housel found out that Apotheker's hiring was a product of amazing haste and carelessness on the part of HP's board. Citing a New York Times report, Housel wrote, "Remarkably, when the 12-member board voted to name Mr. Apotheker as the successor ... most board members had never met Mr. Apotheker. One of the board members who had never met Apotheker tried to explain: 'I admit it was highly unusual. But we were just too exhausted from all the infighting.'"
Symptom No. 4: initial upswing followed by disappointments
To be fair, Apotheker's start wasn't too bad. Between his Sept. 30, 2010, hire date and Feb. 16, 2011, the company's stock rose almost 20%. Then the company issued disappointing guidance for the rest of the year. From then until Apotheker's ouster on Sept. 22, the stock languished, falling more than 50% -- rivals Dell (Nasdaq: DELL ) and Cisco (Nasdaq: CSCO ) outperformed HP by 50% and 30%, respectively, over the same time period.
The big picture
Does this mean that HP is doomed to a slow-death march to bankruptcy? Not necessarily, but it needs to get back to focusing on the things that once made it great. It must also figure out a way to stop both the revolving door in the executive office, along with its free-spending ways with severance packages when changes do eventually happen.
Clearly, I don't think HP is the safest place to park your cash right now. In fact, study after study has shown that the best way to grow value over the long run is to invest in solid dividend stocks. The Motley Fool's hot-off-the-presses special free report -- Secure Your Future With 11 Rock-Solid Dividend Stocks --is an excellent place to start. The report features companies hand-picked by our very best analysts. It's yours today, absolutely free!