The Time Exxon Went Into the Semiconductor Business (and Failed)
And it wasn't just Exxon. In Silicon Valley's early days, all sorts of major corporations tried to get a piece of the pie.
Zilog was founded by Intel veterans Federico Faggin and Ralph Ungermann in 1974.* Their first microprocessor, the Z80, was a hit. Intel's products, the company's Dave House admitted, "kind of got stomped on by Zilog with their Z80." But Zilog's success brought trouble in an unlikely form: Exxon.
First, Exxon made a large investment in exchange for 51 percent of the company. Then, they bought Zilog clean out, despite its next-generation 16-bit microprocessor, the Z8000, not having tremendous success. It was downhill from there. And by 1985, having invested a billion dollars, Exxon sold the company back to some of its employees and the investment firm Warburg Pincus.
I ran across this story while reporting on the history of Intel, and in those key days during the early 1980s, right before IBM decided to use Intel chips, Zilog was providing legitimate competition for the now giant company.
What I soon discovered, though, was that Exxon was not alone in trying to make money off the computing boom. As Forbes recalled in 1997, many companies went chasing tech growth and came up empty-handed or worse.
It seemed like a good idea at the time. Schlumberger was flush with cash from its oil well logging business. Fairchild Camera & Instrument was a pioneer in the semiconductor industry and in need of capital. Semiconductor chips didn't seem too far afield from Schlumberger's expertise. Didn't oil well measuring tools use electronics heavily? Schlumberger wrote out a check for $425 million to purchase Fairchild.
This was in 1979, just before the great boom in personal computers got underway. Schlumberger should have made billions of dollars from its acquisition. But it didn't. In 1987 it sold Fairchild at a $220 million loss to National Semiconductor.
You could make a long list of merger fiascos in computers and electronics: Xerox paying $900 million for mainframe manufacturer Scientific Data Systems in 1969. Exxon buying Zilog, a microprocessor company, and then some word processor companies, into which it sank $1 billion before selling and writing off the businesses. AT&T losing $4 billion on NCR during a bull market.
There was something about the way these companies managed their businesses that seemed destined to run highly innovative chip companies into the ground.
Faggin, for his part, still sounds a little bitter about it all. He left Intel disgruntled and wanted to take the company on. "And we almost succeeded," he recalled in an oral history. "The Z80 was our first product and it became very successful. It took the business away from the [Intel] 8080. Zilog was winning in the market, but then IBM's choice to adopt the Intel 8086 reversed the direction. That was the turning point. By the way, the key reason IBM chose Intel was that our sole investor, Exxon Enterprises, had declared war on IBM."
But it's not just sour grapes. G. Dan Hutcheson, president of VLSI Research, told Forbes, "Zilog might have been what Intel is today, if Exxon hadn't tied them down."
What exactly did they do wrong (aside from tiffing with IBM)? Bernard Peuto, who was at Zilog in the early years and later went on to Sun Microsystems, had a simple answer for what tended to go wrong: The big companies gave Silicon Valley upstarts too much money.
"Quite frankly I blame Exxon," Peuto said in a panel about Zilog at the Computer History Museum. "Exxon essentially choked us with money. They basically gave us too much money and too many directions, which we then kind of went into and in some sense there are times where you have to refuse and that's very hard to do when somebody gives you dollars. But the reality was the reason we were doing too many things is because we could afford to do it because Exxon was kind of giving us the check. That's my personal view. The elephant [had grown too] complex."
And maybe that's the history lesson we can apply today: Too much money too fast breeds too little focus and too much complexity.
* This article previously misspelled the name of one of Zilog’s cofounders. It is Federico Faggin, not Faggins.