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Zilog Going...Private Investment firm acquires Zilog By Craig Matsumoto, EE Times Campbell, Calif. -- Chip maker Zilog Inc. will be changing hands yet again, this time when it merges with the investment partnership Texas Pacific Group, which plans to take the chip company private. Zilog developed the classic Z80 microcontroller, the brains of the TRS-80 personal computer, but the company has never had a high-profile product a la Netscape Navigator or WebTV. As a result, Zilog officials described the merger as a chance to escape the go-go demands of the stock market. Meanwhile, the deal helps Texas Pacific move into technology sectors, a foray it began with the purchase of Lucent Technologies Inc. subsidiaries Paradyne Corp. and GlobeSpan Technologies Inc. All but 400,000 Zilog shares, which will remain with current investors, will be bought by Texas Pacific Group for $25 per share, under the agreement announced July 21, giving Texas Pacific more than a 93 percent interest in Zilog. Zilog stock was trading at $24-1/4 early this week. Zilog executives had decided new tactics were needed to elevate the company's stock price, and investment bank Lehman Brothers was hired four months ago to find new options for Zilog, whether through alliances, refinancing or outright mergers. "There was a sense that the company, as a publicly held company, wasn't fully appreciated in the marketplace," Zilog corporate counsel Richard Pickard said. Zilog's strength was in generating steady cash flow, he said, but the stock market was only interested in seeing "skyrocketing growth," something Zilog couldn't provide. Greg Mischou, an analyst with Alex. Brown & Sons Inc. (San Francisco), said Zilog fell victim to the 1996 revenue slump partly due to the market saturation of 28.8-kbit/second modems. The company's revenues have since begun to recover, "but they didn't have a lot of visibility in their business. So that's one of the reasons they weren't being rewarded" in the stock market, he said. As Zilog was looking for options, Texas Pacific was looking for technology plays. The partnership, which has dual headquarters in Fort Worth, Texas, and San Francisco, was started in 1993 as an investment group aimed at taking over ailing companies. Its first investment was Continental Airlines; the company has sold some of its stake but still holds a substantial portion of Continental. The company's other investments have been scattered throughout different industries including health care, energy and even wine. Three years ago, Texas Pacific began investigating technology companies as possible investments. It began hiring staff such as partner David Stanton to its San Francisco office, bringing in technology expertise, and eventually made its first move with the Paradyne and Globespan acquisitions. Other investors were interested in Zilog, Pickard said. But the board liked Texas Pacific's offer best and approved it unanimously. Texas Pacific has faith in Zilog's product line, which includes controllers for PC peripherals and a variety of communications components, including the upcoming V-chip for blocking television content. Zilog also plans to continue developing its Internet-appliance platform, the company's first foray into building an entire system. In addition, no changes in strategy or management appear to be in the works. "This is not a turnaround story. It's a story about a company with growth opportunities caught in a current downdraft, in a market that's susceptible to occasional downdrafts," Stanton said. In addition, Zilog won't have to worry about capacity any time soon. The company just completed its fabrication facility in Nampa, Idaho, and paid for it in cash. That the fab expenses are said and done is "one of the reasons we're all optimistic about the prospects of this company," Pickard said. Technology is an unusual target for buyout firms such as Texas Pacific, probably because of the effort it takes to understand high-tech businesses, Stanton speculated. As it is, Texas Pacific took about 18 months to make its first deal. "We chose not to ignore it," Stanton said of the high-tech field. "There are certain segments that have the type of cash flow and stability we seek." For Zilog, the deal is another step in a hodgepodge trail of ownership. The company was founded in 1974 and bought by Exxon Corp. in 1980. But Exxon lost faith in Zilog, so Zilog's management and employees bought out their company with the help of venture capital firm Warburg, Pincus Capital Co. in 1989. Zilog then went public in 1991. Shareholders will be allowed to keep Zilog stock if they wish. Warburg, Pincus (still Zilog's largest shareholder) has agreed to retain stock, if the number of shares held by private investors falls short of 400,000. By leaving those shares behind, Texas Pacific can treat the deal as a recapitalization of Zilog rather than as an outright acquisition, a distinction that has some accounting advantages. (Next article.)
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