Exxon’s 1970s‑80s Attempt to Challenge IBM and Its Aftermath

In the late 1970s, the oil giant Exxon declared its intention to challenge IBM in the office equipment business. This seemingly strange venture was the culmination of a decade-long strategy of acquiring technology startups.

Beginnings

The story of Exxon's diversification begins with the 1911 breakup of John Rockefeller's Standard Oil trust. Standard Oil of New Jersey, referred to as Jersey Standard, was ordered to distribute shares of its 34 subsidiaries to its existing shareholders. This distribution, akin to a dividend, famously quadrupled the value of these shares, significantly increasing Rockefeller's wealth.

The breakup created companies carved up by activity or geographical region, with none possessing a fully integrated operation. Eight of these siblings retained the "Standard Oil" trademark, using it within their operating areas. Jersey Standard, however, managed to trademark "Esso" in 1923, a phonetic rendering of S.O. (Standard Oil), which became widely used by the 1930s, much to the chagrin of other Standard Oil entities. Jersey Standard continued to operate under this name until 1972, when it rebranded as Exxon to shed the negative connotations associated with the Standard Oil name and unify its regional trademarks.

Jersey Standard's Core Business

Jersey Standard was not merely a holding company; it was a significant operating entity with productive assets, including major refineries in the US East and Louisiana, and marketing/distribution networks along the East Coast. It also retained all of Standard Oil's foreign interests, notably Imperial Oil in Canada, which later discovered oil at Leduc No. 1 in Alberta in 1947, transforming Canada into an oil powerhouse.

Despite its vast operations, Jersey Standard initially lacked crude oil production. To address this, it acquired 50% of Humble Oil Refining, a fast-growing Texas oil producer, in 1919. Internationally, it secured oil production interests in Latin America, particularly Venezuela. After World War II, Jersey Standard expanded into the Middle East, acquiring a 30% stake in Aramco (now the fifth-largest company globally by revenue) by 1948, and joining a multinational consortium to operate Iran's oil industry in 1954.

The Oil Glut and Diversification

By 1958, Jersey Standard was the world's largest oil firm, with $7.5 billion in revenue, second only to General Motors on the Fortune 500. However, the 1960s brought an oil glut, exacerbated by the Iranian consortium agreement and rising Soviet oil production. Despite record sales, profits in 1958 were only a third of what they had been at the start of the decade. Forbes Magazine highlighted the need for Jersey Standard to adapt, suggesting that relying solely on oil would hinder profitability.

In 1960, CEO Monroe "Jack" Rathbone commissioned the "Jones Report," which concluded that the oil glut would persist and that oil and gas was no longer a growth business. While not advocating for abandoning oil, the report recommended diversification to achieve growth.

Chemical Expansion

The most apparent diversification path was into chemicals, where Jersey Standard already had a presence through its "Esso Chemical" brand, producing petrochemicals like rubbing alcohol and ethylene for over 40 years. This business line was small, generating only $250 million in revenue in 1959. However, with cheap oil feedstock, the company saw an opportunity to produce higher-value chemical products.

The board approved an aggressive expansion into plastics and chemical fertilizers through a new Esso Chemical subsidiary. The annual investment budget for Esso Chemical dramatically increased from an average of $53 million (1961-1963) to $257 million in 1964. This led to rapid global expansion, particularly in fertilizers, driven by a UN call to increase food production. Plants were established across Central America, the Caribbean, Asia, and Europe.

Esso Research, Jersey Standard's internal research institute, received 10% of corporate profits, with a quarter allocated to petrochemicals, exploring opportunities in steel-making, agriculture, and building materials. A notable innovation from this period was fluidized iron ore reduction, a method to produce Directly Reduced Iron (DRI) for steelmaking, bypassing traditional steps.

Challenges in Chemicals

Despite the ambitious push, the chemical diversification faced intense competition from other oil giants already in the petrochemicals market. Rathbone acknowledged this, stating that while petrochemicals were fashionable, they were not a "guaranteed gold mine" and many companies would lose money.

Indeed, the rapid expansion proved problematic. By 1965, Esso Chemical returned only 4% on its net total assets, with thermoplastics and fertilizers being oversupplied and unprofitable. By late 1966, Jersey's management curtailed the chemical program, refocusing on profitability. While the US chemicals division eventually became profitable, foreign ventures were a mess and took years to rectify. In the 1970s, Esso Chemical found success by focusing on specialty chemicals, generating hundreds of millions in profits.

Jersey Enterprises and Other Ventures

In 1963, Jersey Standard formed Jersey Enterprises to explore "new investments" and further diversification. This entity aimed to identify new ventures that could generate $100 million in revenue.

Early projects included building a test factory for Esso Research's fluidized iron ore reduction method in Dartmouth, Nova Scotia. In 1964, Jersey Enterprises acquired American Cryogenics Inc. for $37 million to develop industrial gas technology, but this venture was abandoned in 1968 due to uncompetitive technology.

Another unusual venture was a 1965 partnership with Nestle's affiliate in Guatemala to develop WO-100, a protein food made from bacteria raised on hydrocarbons. This bland white powder, when fed to chicks, resulted in "poor" performance without additional vitamins, and never reached the market. Other failed technologies included using petroleum residues for building blocks and efforts in medical instruments, nuclear energy, and fuel cells. Over time, Jersey Enterprises narrowed its focus to a few promising areas, one of which was information technology.

Vydec: Exxon's First IT Success

Jersey's first significant IT success was Vydec, a word processor manufacturer. Dedicated word processors, emerging in the early 1970s, combined typewriters with video screens and data storage, allowing for electronic writing and editing.

Vydec, founded by former Hewlett-Packard employees Patrick P. DeCavaignac and two others, approached Jersey Enterprises in 1971. After HP terminated their computer terminal project, DeCavaignac saw potential and, working from a basement, developed a word processor with a video screen and floppy drive—one of the first to feature a floppy.

After several venture capital firms passed, Jersey Enterprises invested $500,000 (approximately $3.7 million today) in early 1973 for 40% equity, eventually owning over 80%. With funding from Exxon (which Jersey Standard had rebranded to in 1972), Vydec manufactured its word processors and built a large sales team. Despite competition from companies like Linolex, Lexitron, AES, IBM, and Wang Labs, Vydec grew rapidly, opening over 50 sales offices. In 1977, Vydec generated an estimated $24 million in revenue, a substantial sum for many companies, but a mere fraction of Exxon's $48.6 billion in oil revenue that year.

This disparity highlighted a recurring theme: Exxon Enterprises' projects, while successful in their own right, were dwarfed by the oil business. Exxon managers acknowledged there was no "grand scheme," but aimed to accumulate several $100 million companies in their portfolio. The investment portfolio expanded to include Periphonics Corporation (computer voice imitation) and Micro-Bit (electron beam accessed memory).

Zilog: The Iconic Microprocessor

Exxon Enterprises' most famous investment was Zilog, a microprocessor company founded by former Intel employees, including Federico Faggin, designer of the Intel 4004, 8008, and 8080.

After leaving Intel, Faggin and co-founder Ralph Ungermann announced their intention to form a new microprocessor company, catching the attention of Exxon Enterprises. Exxon's team met with them, and in 1975, Exxon became the sole investor. Zilog consistently advertised itself as an Exxon affiliate.

While their initial chip, the 2001, didn't materialize, they launched the Zilog Z80 in mid-1976, an iconic 8-bit microprocessor that challenged the Intel 8080 and remains fondly remembered by enthusiasts.

Exxon and Zilog's Relationship

Faggin acknowledged that Zilog would likely not have succeeded without Exxon's funding, especially given the dried-up VC market after the early 1970s stock bubble. Exxon Enterprises was a crucial source of capital. Ungermann noted that the Exxon name helped secure design wins, telling customers they had "the money of Exxon and the brains of Intel." Exxon's funding also enabled Zilog to build its own fabrication plant after the Z80's success.

However, the relationship became a "double-edged sword." Former employee Bernard Pueto stated that Exxon provided too much money and too many directions, leading Zilog into ventures it shouldn't have pursued. Young managers lacked the experience to push back. Faggin spent more time in New York dealing with Exxon than in California working with customers, leading to friction with Ungermann, who eventually left.

Taking on IBM

Unbeknownst to Zilog, Exxon was planning to compete directly with IBM. Exxon's foray into office equipment began in 1975 with the development of a new typewriter. This resulted in the Qyx "intelligent" typewriter, powered by a Z80 chip, priced at $1,390. It was touted as the first electronic typewriter with 70% fewer moving parts and could connect to the Vydec word processor.

Another product, the QWIP, an early fax machine, allowed users to send pages of text or images in minutes. These products bolstered Exxon Enterprises' confidence, leading them to convene their senior executives to brainstorm the future of IT and formulate a strategy to challenge IBM and Xerox.

In late 1978, Exxon consolidated Vydec, QWIP, Qyx, and 12 other investments into Exxon Information Systems (EIS). Exxon aimed for EIS, which generated $100 million in 1978 and $200 million in 1979, to become a major player in office equipment within three to five years.

Some analysts were optimistic, with one from Yankee Group in 1980 predicting that EIS could eventually rival or surpass Exxon's oil business, forecasting a $150-$200 billion IT market by the end of the 1980s, with Exxon capturing 10%.

However, many were skeptical. The sheer size of Exxon's oil business ($84 billion in revenue in 1979) meant that even a successful EIS, comparable to Xerox ($7 billion in revenue), would be a small contribution. Others criticized the strategy of combining disparate small companies, noting that EIS started with 6,000 employees and a 40-page organizational chart. John Cunningham, EVP at Wang Labs, famously remarked on the difficulty of integrating such diverse entities.

Withdrawal

Exxon Information Systems quickly proved the skeptics right. Exxon had invested in traditional word processors and office products just before the PC revolution. The Apple II microcomputer, introduced in April 1977, combined with Visicalc, rapidly made Exxon's offerings antiquated. The TRS-80 computer, ironically powered by Zilog's Z80, further accelerated this shift.

Exxon lacked the corporate structure and culture for the fast-moving, talent-centric IT environment. Faggin noted the slow decision-making process within Exxon. The company struggled to develop new products; the second-generation Qwip machine took six years to develop and was flawed upon release, with paper feeder jams. Other product issues included Vydec being barred from US government work due to security concerns, and a Qyx intelligent typewriter catching fire at Exxon's own headquarters. Even Exxon's marketing division in Houston preferred Wang products, eventually being forced to use Exxon equipment, which they returned a year later.

IBM, despite its size, had a massive sales force, cutting-edge technology, and the "nobody got fired for buying IBM" perception. Even so, it needed a "rebel" team to create the IBM PC. Exxon's competitive stance against IBM also influenced IBM's decision not to use the Zilog Z80 for the PC, opting instead for the Intel 8088.

Ben Sykes' projection of EIS reaching $400 million in 1980 and doubling to a billion within a few years proved overly optimistic. Despite increased investment, revenue growth stalled. In 1981, Exxon cut its EIS workforce from 6,000 to 4,000, shut down QWIP factories, and reorganized the division. The IBM PC's release that year further rendered EIS's lineup obsolete.

Exxon continued for two more years, with annual reports claiming narrowing losses and new products. Finally, in 1984, the company admitted defeat, selling off business lines and closing the rest. Obsolete QWIP machines were reportedly bulldozed at a dump.

Conclusion

Zilog was the last company in the Exxon Enterprises portfolio to be divested. It was sold in the late 1980s through a management buyout backed by Warburg Pincus for a very low price (about 4 times free cash flow). Warburg took Zilog public in 1991 and later sold it in 1997 for $527 million, yielding a 12-fold return on a $17 million investment.

While the office equipment venture failed, some of Exxon's other diversification efforts were more successful, such as residential and commercial real estate development in Houston through Friendswood Development. Mineral ventures (coal, zinc, molybdenum, copper) had mixed results, and the Chemicals business eventually became profitable.

The experience with Exxon Information Systems deeply impacted Exxon's senior management. In 1993, CEO Lee Raymond reinforced the core message: Exxon was an oil company, nothing more. Over the next two decades, he intensified the company's focus on oil and gas, leading ExxonMobil to become one of the largest and most profitable companies globally by the late 2000s.