523 Race Street
San Jose, California 95126
Telephone: (408) 558-8500
Fax: (408) 558-8300
Web site: http://www.zilog.com
Sales: $95.6 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: ZILG
NAIC: 334413 Semiconductor and Related Device Manufacturing
ZiLOG, Inc., designs, develops, and manufactures 8-bit micrologic semiconductor devices, also known as embedded control devices, used in consumer electronics, home appliances, security systems, point-of-sale terminals, personal computer peripherals, personal health and medical products, and industrial and automotive applications. The company was a pioneer of the computer chip industry in the mid-1970s. Weak demand for its products and lack of a stable business strategy left it stumbling for many years during the 1980s and 1990s. ZiLOG filed for Chapter 11 bankruptcy protection in 2001. It emerged the following year with plans to focus solely on embedded control devices.
Formed in the mid-1970s, ZiLOG was a trailblazer in the semiconductor industry and a pioneer of the California high-tech hotbed known as Silicon Valley. The company was founded by electrical engineer and entrepreneur Ralph Ungermann. Ungermann grew up in California. His parents, both educators, encouraged active learning, and Ralph proved to be a quick study and hard worker. In high school, Ungermann was fascinated by an event that would change the course of his life: The Soviet Union launched Sputnik, the world's first satellite. "I was leaning toward a career in law or medicine when the Russians launched the space race," Ungermann recalled in the December 17, 1990 Business Journal-San Jose. "I was absolutely enthralled. I would be an engineer."
Ungermann won a Navy scholarship that allowed him to eventually complete his electrical engineering degree at the University of California at Berkeley, and then a master's degree in computer architecture from the University of California at Irvine. After college, Ungermann took a job with Collins Radio, which was one of the leading technology firms of its day. During his stint at Collins, Ungermann became fascinated with semiconductors. Semiconductor breakthroughs during the 1960s by Bell Labs and other companies were just beginning to open the door to a commercial chip industry. When Rockwell International purchased Collins in 1969, Ungermann decided to leave the company for Silicon Valley pioneer Intel.
Ungermann gained valuable experience working for Intel between 1971 and 1974. He also invested heavily in Intel stock options and learned a tough lesson in personal debt accumulation. While looking for a better-paying job to help him pay off some of his debts, he developed a plan to start his own company. Ungermann teamed up with another Intel engineer, Federico Faggin, to cofound ZiLOG. They planned to develop an 8-bit microprocessor (a computer's central processing unit on a silicon chip) that could drive desktop computers, which were a relatively new concept at the time. Shortly after starting the company, the two engineers scored a major victory when they managed to convince the giant Exxon Corporation to write a $1.5 million check to launch their research and development effort.
In less than a year Ungermann's team had created a breakthrough 8-bit microprocessor, beating the well-heeled Intel and Motorola to the punch. Dubbed the Z80, ZiLOG's chip was an immediate hit. The Z80 became the heart of many of the earliest personal computers and the processor of choice for electronic game manufacturers like Coleco in the emerging video game industry. Within a few years ZiLOG was generating $50 million in sales annually. Exxon, delighted with ZiLOG's success, began investing heavily in the company. With Exxon's financial backing, ZiLOG began drafting plans to start manufacturing computer systems and semiconductor components to complement its cutting-edge chips.
At the same time, ZiLOG tried to maintain its lead in the race to build faster, more powerful microprocessor chips. To that end, in 1979 ZiLOG introduced its second-generation, 16-bit chip, called the Z8000. The chip was a dynamo, but it appeared about a year after Intel's 16-bit chip, the 8086. ZiLOG was also slow to bring out the complementary software that potential users of the chip needed to incorporate the microprocessors into their electronics products, and as a result the company was unable to capitalize on its established market presence to counter its late start. The result was a pounding by the competition.
The hardest blow to ZiLOG was delivered by IBM, which selected Intel's easier-to-program 8086 to drive its first personal computer, and Intel went on to become the multibillion-dollar leader of the global chip industry. Aside from losing its command of the chip industry, ZiLOG was forced to deal with the displeasure of Exxon. After investing millions of dollars into research and development at ZiLOG, Exxon began to lose patience.
Throughout the late 1970s Exxon had allowed ZiLOG to operate autonomously. Critics charged that ZiLOG, free from constraints placed on other companies by financial markets, wasted millions of dollars developing technologies without a solid business plan. When it became clear that ZiLOG was losing the chip race, Exxon began to assert more control and started to steer ZiLOG toward the field of computerized manufacturing. ZiLOG's management resisted Exxon's direction, and in 1979 Ungermann left to start a new company. Faggin remained for another year in a diminished managerial role before leaving to start his own venture.
After peaking at more than $100 million in annual sales, ZiLOG's revenues started to slip and the company began to lose money, posting an embarrassing deficit of more than $30 million in 1981 and 1982, combined, as Exxon scrambled to fill the leadership void left by Ungermann. Manny Fernandez, a rising star who Exxon lured away from Fairchild, filled in as chief executive for several months. He, too, fled to start his own computer company, however, after becoming disillusioned with ZiLOG.
In May 1982 Exxon hired Franc deWeeger to head the limping ZiLOG. The 50-year-old deWeeger was a seasoned semiconductor manager with more than 15 years at Motorola and two years with a small technology company called Signetics. DeWeeger moved quickly to change the situation at ZiLOG. "When I joined the company," he said in the June 20, 1983 Forbes, "everybody was moaning and groaning about Exxon. I said, stop pointing the finger at Exxon … the responsibility lies with the management team." Aside from shaking up management, deWeeger scored a few encouraging victories. Significantly, he succeeded in getting Commodore to adopt ZiLOG's Z8000 chip as the microprocessor for its next-generation home and business computers. He also won an $18 million contract to supply the Internal Revenue Service with computers from ZiLOG's struggling systems division.
Despite deWeeger's best efforts, ZiLOG posted successive losses throughout the early 1980s and into the mid-1980s and, were it not for the deep-pocketed Exxon, would likely have gone out of business. By 1985 the end seemed near. "It did not seem as if there were any way to recover," William Walker, senior vice-president and chief financial officer of Exxon Corporation, recalled in the June 1989 Electronics. As a last-ditch effort, Walker brought in 55-year-old E.A. Sack to try his hand at revitalizing the chip company. "Turn it around or shut it down," was the mandate given to Sack.
Sack was born and raised in Pittsburgh and had worked as an underaged employee in the local steel mills during World War II. Older G.I.s got him interested in the field of electronics at Carnegie Mellon University, where Sack was a top student. One of his professors was Gaylord Penney, the inventor of many early cutting-edge electronics products. Sack and Penney struck up a relationship and continued to talk regularly on the telephone into the early 1990s, by which time Penney was 95 years old. Sack graduated at the top of his class and went on to get master's and doctoral degrees in electrical engineering. He worked at various technology leaders including Bell Labs, General Electric Co., and Westinghouse, where he was a rising star in research and development. Sack also had a knack for sales, which allowed him to work his way into the executive ranks first at Westinghouse and then at General Instruments Corp. He boosted sales from $10 million to $180 million over a 10-year period at General Instruments before accepting Exxon's ZiLOG challenge.
By the time Sack took over, sales had fallen to $50 million, the organization was losing $5 million per month, employee morale was at an all-time low, and the company's prospects were dismal. In Sack's estimation, ZiLOG was still trying to be a contender in an industry niche that it had long ago forfeited. Sack quickly took drastic steps, laying off most of the 1,000 employees at ZiLOG's Campbell, California headquarters and moving manufacturing activities to lower-cost regions in the United States and overseas. He jettisoned unremarkable managers and junked many of ZiLOG's poorly performing operations. His actions earned him little favor within the ranks of ZiLOG's workforce. One disgruntled former employee, in fact, returned with a rifle and fired shots into windows at the headquarters building.
Our strategy is to be a key provider of micrologic devices. To implement our business strategy, we intend to focus on our core 8-bit micrologic business, expand our addressable portion of 8-bit market, introduce devices targeted at key vertical markets, deliver complete solutions to our customers, and utilize efficient manufacturing.
ZiLOG's financial performance quickly began to improve, with the company posting its first profit in 1986 after several years of consecutive losses and continuing to record surpluses throughout the late 1980s and early 1990s. Much of the key to ZiLOG's turnaround was Sack's innovative product strategy. Rather than chase the hyper-competitive market for cutting-edge microprocessors, he decided to tailor ZiLOG's existing and proven technologies for specific niche markets that were less competitive, but also less risky. "The whole company was trying to relive the Z80 thing," Walker explained in the October 12, 1992 Business Journal-San Jose. "He was quick and decisive in making the fundamental changes that clearly saved the company."
Recognizing ZiLOG's limited ability to compete in 16-bit and emerging 32-bit technologies, Sack decided to draw on ZiLOG's old Z80 8-bit chip to manufacture new application-specific standard circuits (ASSCs), which are essentially chips tailored for specific applications. For example, ZiLOG was able to create special versions of its Z80 chip for use in telephone answering machines and to control closed-caption television systems. The strategy was effective, as evidenced by sales and profit gains beginning in 1986. To augment its 8-bit ASSCs, Sack initiated the development of a new family of 8-bit micro-controller chips called the Z8. Sales of those controllers, combined with demand growth for Z80 processors, allowed ZiLOG to double its revenues between 1985 and 1989 to more than $100 million annually. Furthermore, ZiLOG was aggressively developing technology for cell-based application-specific integrated circuits, or circuits designed for a specific customer, rather than a standard application.
In addition to his savvy product strategy, Sack was able to realize impressive gains at ZiLOG with a management strategy he had created at General Instrument Corp. called "forward controllership." Forward controllership was a closed-loop system used to manage revenue, variable costs, fixed costs, and cash. The advantage of the system was that it helped managers to focus on current and future growth and costs, rather than on past performance. The system involved relatively advanced computer modeling techniques and information management systems. Sack had found it extremely helpful in minimizing expenses and maximizing the return from limited resources.
Having achieved profitability with the subsidiary, Exxon decided early in 1989 that it was time to sell off ZiLOG and get out of the semiconductor business. With the backing of venture capital firm Warburg Pincus, Sack and a group of executives spearheaded a leveraged buyout that included ZiLOG's employees. The purchase made ZiLOG independent, but it also saddled the company with $33 million in debt. Fortunately for ZiLOG, Sack's new operating strategy proved more successful than most observers had suspected it would. The company was soon generating more than enough cash to cover its debt service and was even able to begin reducing its liabilities. ZiLOG capitalized on its success in 1991 by taking the company public. The initial public offering virtually eliminated ZiLOG's long-term debt and positioned it to capitalize on overall semiconductor market growth throughout the early 1990s and into the mid-1990s.
ZiLOG topped its remarkable late 1980s recovery with impressive revenue and profit gains in the 1990s. Sales grew 10 percent to $110 million in 1991 before jumping to $146 million in 1992, $203 million in 1993, and $223 million in 1994. Likewise, net income grew from $6.8 million in 1990 to $15.8 million in 1992, and $34.9 million in 1994. ZiLOG managed to achieve that growth without assuming any long-term debt, and invested heavily to continually upgrade its state-of-the-art production facilities and to sustain its research and development pipeline of new circuits. By the mid-1990s, ZiLOG was manufacturing and marketing circuits for a wide range of applications, including interactive television controllers, computer modems, electronic musical instruments, garage door openers, and a digital video-image enhancement system that converted standard television pictures to much sharper images.
ZiLOG entered the mid-1990s with its sights set on the sprawling information highway. Still drawing on Z80 and Z8 ASSP technology, as well as other proprietary technologies, it was manufacturing and developing a wide range of semiconductor products aimed at computer networks, interactive multimedia, and wireless communications. In 1995 ZiLOG employed about 1,500 workers, operated manufacturing facilities in the United States and the Philippines, and supported 26 direct sales offices and 120 distributors throughout the world.
ZiLOG faced falling profits once again in 1996 and 1997 as demand for its products began to weaken. When Lucent Technologies Inc.—its largest customer—failed to renew a contract, ZiLOG found itself facing a major financial setback. To make matters worse, a new fabrication facility that opened in Idaho remained underutilized due to the falling demand.
In 1997, private investment firm Texas Pacific Group (TPG) agreed to acquire ZiLOG. The $396 million transaction was completed early the following year. Curtis Crawford, a seasoned executive who had worked for IBM, AT&T, and Lucent Technologies, was tapped to orchestrate a turnaround. "I did not come here to be part of a small company," Crawford claimed in a June 1998 Electronics Times article. "I came to ZiLOG to change its direction, and make it an even larger, more successful microconductor company." Indeed, Crawford quickly launched a realignment that turned ZiLOG's focus to supplying embedded chips to the home entertainment industry, to the standard products and integrated devices market, and to the transaction-style communications devices market.
As part of this strategy, ZiLOG acquired chip designer Production Languages in 1999 and bought a 20 percent interest in Qualcore Inc. The company also set plans in motion to team up with Sunbeam Corp. to develop chips that would enable household appliances to communicate, or be connected, with each other. With ZiLOG's fortunes back on the rise, TPG planned to take the company public in 2000.
Those plans were scrapped, however, when problems began once again to plague the company. As demand for the company's products waned, the firm found itself buried in debt as costs continued to climb. Crawford stepped down in early 2001, leaving former chief financial officer Jim Thorburn at the helm. Knowing the company needed some drastic measures to keep it afloat, Thorburn immediately set out to restructure the company's finances. ZiLOG filed for Chapter 11 bankruptcy protection while its creditors swapped more than $300 million in debt for equity. By the time ZiLOG emerged from bankruptcy in 2002, TPG had sold off its ownership stake.
Under Thorburn's leadership, ZiLOG went back to its roots and focused heavily on 8-bit micrologic semiconductor devices—also known as embedded control devices. The company defined micrologic device in its 2004 Securities and Exchange filing. "Micrologic devices," ZiLOG reported, "typically combine a microprocessor, memory, and peripheral functions on a single device. Our embedded control devices enable customers in our target markets to control the functions and performance of their products. By embedding their application software on our devices, customers can control a wide variety of products such as consumer appliances, infrared remote controls, security systems and battery chargers."
As part of its new strategy, ZiLOG shuttered its communications business while producing 60 new products including the eZ80 Acclaim! 8-bit microcontroller that was used in products such as USA Technologies' cashless vending machines. In 2004, it launched its Z8 Encore! XP flash microcontroller product line. By that time, ZiLOG was once again trading on the NASDAQ and its financial position appeared to be stable. The company's management team was confident ZiLOG was finally on the right track for success in the years to come.
ZiLOG Philippines, Inc.; ZiLOG Electronic Philippines, Inc.; ZiLOG Asia Ltd.; ZiLOG Japan K.K.; ZiLOG International Ltd.; ZiLOG International Pte. Ltd.; ZiLOG UK, Ltd.; ZiLOG India Electronics Private Ltd.; ZiLOG MOD III, Inc.
Atmel Corporation; Freescale Semiconductor Inc.; Microchip Technology Inc.
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—update: Christina Stansell Weaver