Merge Now, Pay Later
Take it from the Cuningham Group: You can throw your heart and soul into melding two companies' cultures and still not get it right
In November 1997, John Cuningham had the sorry task of announcing to his staff that although revenues for his Minneapolis-based architecture firm were up to $26 million -- a 20% increase over the previous year's revenues -- corporate profits hadn't kept pace. So there wouldn't be any company 401(k) match that year, and the total profit-sharing contribution would drop from $150,000 in 1996 to zero for 1997. And there was no getting around it: it was because of the merger.
That wasn't the position Cuningham thought he'd find himself in when he announced to the staff in 1995 the impending merger of the Cuningham Group, in Minneapolis, with Solberg + Lowe Architects, a firm with offices in Los Angeles and Phoenix. The rationale behind the move was to expand the Cuningham Group's geographic reach beyond Minnesota and to broaden its range of jobs beyond the group's mainstay sectors of education and hotels, and include entertainment projects.
By the time Cuningham found himself making his dour profit-sharing announcement, the merger had achieved the bump in sales he had anticipated. But Cuningham had significantly underestimated the bottom-line drag of bringing together two companies in three scattered locations. "At first I thought revenue and profit growth would be parallel," he says. "But that wasn't the case. That was probably my optimistic self talking." It turned out, however, that money would be the least of his worries. Cuningham was confident that his financial expectations would eventually pan out; his primary concern was how to continue to merge the cultures of two companies thousands of miles away from each other to create, as he calls it, "one office with long corridors."
Cuningham's challenge is one that many CEOs today can sympathize with. Industries are consolidating left and right, and many companies are joining the feeding frenzy and growing by acquisition. The numbers are particularly dramatic in the field of architecture. According to Mick Morrissey, senior vice-president at Zweig White and Associates, a management-consulting and publishing company in Natick, Mass., nationwide merger activity for architecture firms, virtually nonexistent 10 years ago, has more than doubled during the past 5 years, with 72 mergers in 1999. And although there are scores of folks who can crunch the numbers to gauge the success potential of a merger, not so many managers have a mastery of the people side. "The business part is easy," says Cuningham. "It's the cultural part that's hard. The checkbooks and accounts you can do in an afternoon. The culture takes you a lot longer."
As Cuningham's experiences of the past four years document, even in the most scrupulously planned and executed merger unexpected issues arise that can make those involved question whether the upside potential is really worth the pain.
For the Cuningham Group, the merger process began in the summer of 1995. John Cuningham and his three partners began looking around for relatively small acquisition candidates in the entertainment mecca of Los Angeles. One partner, John Quiter, made a trip to the West Coast that June to scope out some possibilities. "He was just going to get the lay of the land," says Cuningham. "I expected him to come back with a handful of candidates and a few more maybes." But Quiter surprised both his partner and himself by announcing upon his return that he had found what he felt was the ideal merger candidate. "He came back and just said, 'I think these are the guys," says Cuningham. "That was amazing."
The "guys" were Rick Solberg and Doug Lowe, whose architecture firm saw a lot of work in entertainment and hotels but whose business had been dropping off because of a serious mid-1990s recession in the Los Angeles area. Which meant the Cuningham Group would be able to pick up what it considered to be a good firm for a good price. After a year's courtship, Solberg and Lowe came in as part owners of the Cuningham Group through a combination of a nominal payment for Solberg + Lowe's assets and a modest chunk of stock. "I know it looks shrewd, but we just don't think like that," says Cuningham of the serendipitous timing. "Bottom fishing just turned out to be a very good move."
Both sides agree that this wasn't a deal they could score exclusively by the numbers. "If you're selling or buying to get the money and get out, that's not a merger, it's a transaction," says Cuningham. Solberg agrees. "Sure, the business reasons are important," he says. "But in the long term it's based on personalities." Still, the union needed to make business sense. And in retrospect, Cuningham says, "we gave them the muscle and the management skills. They brought us good design skills and marketing savvy."
When Quiter and Cuningham first looked at Solberg + Lowe's offices in the Los Angeles area and in Phoenix, in August 1995, they immediately liked what they saw, beginning with the office milieu. Cuningham's own headquarters, in Minneapolis, are in a hip converted mattress factory overlooking the Mississippi River, with high ceilings, exposed brick, and funky postmodern lighting fixtures. At that time, Solberg + Lowe had offices in the lower level of an airplane hangar in Santa Monica, but what struck Cuningham were the models hanging from the ceiling and the disarray and detritus of in-the-works projects scattered about. "It was like looking at an old photograph of ourselves," says Cuningham.
But more than just the physical surroundings, Cuningham and Quiter liked the work atmosphere. "I felt that it would be easy for me to work there," says Cuningham. "The way they dressed, the way they laughed, they looked like they were working hard but having fun. It didn't feel like the rules were 'Keep your mouth shut and your head down." He also liked the way the principals got their hands dirty. As Cuningham was admiring the numerous intricate and lovingly rendered architectural models, he asked who had constructed them. "I expected to hear it was some little guy in the corner, but it was Rick Solberg," says Cuningham. "He continues studying architecture by making models. He's still having a good time with this."
Solberg and Lowe had a similar feel-good experience when they visited Minneapolis for a day in the summer of 1995. Solberg had been very specific about what he hoped to find. "I wanted to see live, vibrant contributors on the ownership side," he says. "I didn't want a bunch of dead initials on the door." The men liked what they saw. "Doug and I walked in and said, 'This is where we'd want to be," says Solberg.
Although the fit felt good in the office, all involved wanted to make sure that the management teams got along outside the office as well, before shaking hands on the deal. To cut costs and to become better acquainted, they stayed in one another's homes when business took them to each other's cities. "Whether we were going to dinners together or spending weekends together," Solberg says, "we wanted to have time where we turned off the pagers and the phones and talked about what we like to do outside of work."
As the pre-merger equivalent of a first date, the two companies joined forces on a couple of hotel projects in Mississippi in the fall of 1995. Cuningham was particularly eager to give his staffers the opportunity to do their own cultural due diligence. "How much can you show them with slides?" he asks. "OK, Solberg + Lowe has a cool office. But they could have been really groovy-looking people, and I could hate every one of them. You can communicate all you want; it's working together that gets people to enjoy and respect one another."
The first date was a success. "Problems and differences came up," Solberg says, "but they had the willingness to have a dialogue. If we said, 'That isn't the way we do it,' they said, 'Tell us why you do it your way.' How we do what we do isn't really doctrine, and they seemed receptive to other ways of getting it done." Cuningham had a similar response. "We were learning how to work together and finding that it worked."
That was just the beginning. Everyone agrees that the holiday party in January 1996, although costly, was the best move the two companies made to get buy-in from their staffs. The Cuningham Group flew 38 people -- the entire staff of Solberg + Lowe, plus spouses, children, and significant others -- to Minneapolis. "That probably saved us five or six months in long-distance-bonding time," says Cuningham. "It was very expensive but well worth it. People still talk about it."
As well they might. In a friendly salute to their rugged Minneapolis colleagues, the Solberg + Lowe staffers wore lumberjack shirts and, as a token of their own sun-drenched lifestyle, presented the Minneapolis office with a classic surfboard, a Jacobs "longboard," upon which all the Angelenos and Phoenicians had signed their names. The Minneapolis crew greeted their western guests -- who would be staying in their homes -- with an odd assortment of scarves, hats, and gloves from the Salvation Army. "I still have my dashing Austrian hat with the feather," says Solberg.
To continue the getting-to-know-you process, the six partners of the soon-to-be-conjoined firms got together for a management retreat in Keystone, Colo., during the spring of 1996. They spent part of the time golfing and hiking, and part of the time holed up for a three-day session with a management consultant, personality profiles, and a bunch of flip charts and markers, planning out the strategic future of their incipient corporate entity.
Nothing, they realized, could take the place of daily face-to-face contact, so having at least one partner in each office would be crucial. The final arrangement had John Cuningham, John Hamilton, and Tom Hoskens remaining in Minneapolis, John Quiter joining Doug Lowe in Los Angeles, and Rick Solberg ending up in Phoenix.
Today board meetings rotate among the three locations, and design staff members travel among the offices on a project-by-project basis. Every July, to celebrate the anniversary of the 1996 merger, each office holds a party on the same day, called "Interdependence Day." On the first Interdependence Day, in 1996, the entire company gathered in Minneapolis, and the home team presented a genuine Old Town brand canoe to its western colleagues.
Even happy unions have their tribulations. Think of The Brady Bunch. Father with three boys marries mother with three girls. Six kids, one bathroom -- you do the math. So it is with culture melding. "You can't just lump them together and treat them all the same," says Cuningham. "Each office had a strong regional identity." Solberg agrees and sees the upside. "We don't want to create homogenized architecture," he says. "The challenge is nurturing the creative spark without putting a corral around it. If you want to be on the cutting edge in design, you can't do it by committee."
The merger agreement specified that the new entity would use the name the Cuningham Group, which Solberg admits took some adjustment on his part. "That was part of the strategy for us to come together," he says. "Sure, I regret the fact that my legacy has been removed from the overall banner, but we all thought keeping our name would be contradictory to the process of becoming one group."
"We couldn't reach anyone on a Friday afternoon," says John Cuningham. "We weren't sure how that was going to work out."
As the summer of 1996 passed, Cuningham, Solberg, and their newly amalgamated staff started to notice how the two companies, which had seemed so similar, began to show fundamental differences. Some were only on the surface, like the dress code. "We're all pretty much a knit-shirt crowd, and up there in Minneapolis you have some pretty tightly knotted ties," says Solberg. That sartorial stance on the part of the Minnesotans was due more to personal choice than to a dress code, so there wasn't much there to work through. More critical, the Los Angeles and Phoenix offices were used to fitting all their hours into a four-and-a-half-day workweek, taking off on Friday afternoons. "We couldn't reach anyone in those offices on a Friday afternoon," says Cuningham. "We weren't quite sure how that was going to work for us. At first we wondered if they were just lazier than we were. But we just had to adjust."
Another adjustment the Minneapolis folks chose to make had to do with meetings. "We discovered that we had a lot more meetings than they did," says Cuningham. "They used to say to us, 'What are all these meetings for? Just tell them what to do, and have them do it.' That's one of the ways they've been good for us. Now before we schedule a meeting we say, 'What's it for?"
Other differences -- like communication styles -- have been more central to the company's daily functions. "Doug Lowe and I have always been very frank with each other," says Solberg. "They were surprised at first because Doug and I act like brothers, and not always in the good sense. Sometimes we're like an umpire and a manager nose-to-nose screaming at each other. That really shocked them." Conversely, Cuningham and company were the living embodiment of "Minnesota nice." "That's when you go out of your way to say nothing but nice things to people, but behind the scene you're passive-aggressive," Solberg says with a laugh. He says that he and Lowe have learned to be more tactful in front of their midwestern colleagues.
Each firm also discovered that it could offer the other a little assertiveness training. Solberg + Lowe had been much more laid-back than the Cuningham Group when it came to accounts receivable. "They'd be like, 'Hey, Harry's a good guy. He's always paid us before," says Cuningham. "But if you don't pay your gas bill, they shut your gas off. It isn't mean or kind, it's just policy. And it has to be the same for everyone." Solberg admits that he and Lowe had been a lot more easygoing when it came to collections and such. "In a bigger organization, there are a lot more rules to follow," he says. "I'm still fighting that three years later."
For its part, Solberg + Lowe taught the Cuningham Group a thing or two when it came to getting new work. "They needed to learn how to be more aggressive in marketing," says Solberg. "New business doesn't necessarily just come along. You need to find projects well in advance of when you need them."
Intense as the partners' efforts were to keep everybody in the loop, that was easier planned than accomplished. "That 'one office with long corridors' stuff is pretty much crap," says Wade Morgan, a project manager who has worked at all three offices. At first when the two companies came together, there was an underlying sense of apprehension among the offices. Organization charts changed, lines of management shifted, and petty jealousies developed over which office had what resources. "There was a keeping-up-with-the-Joneses mentality," says Morgan. Two things the smaller offices focused on were the Minneapolis office's larger library and larger support staff. "People would ask, 'Why don't we have this or that?' And the only thing I could say was, 'This office has been larger longer, and we have to have the support."
The outlying offices also bore the brunt of the communication gap. Amado Guevara was hired as a designer in the Phoenix office shortly after the merger, and he says that the company's Arizona outpost often felt like the ugly stepchild. "At the time we didn't have a partner there," says Guevara. "We were the smallest office, and we didn't have a lot of local work. So we saw the other two offices doing a power play, getting us to work on their projects." Feeling disconnected and subordinate to Los Angeles and Minneapolis proved demoralizing for the Phoenix crew. "That got better over time," says Guevara, mostly because Rick Solberg has since moved to Phoenix and the office has picked up a lot of its own local work.
Some of the communication challenge that the newly composite Cuningham Group experienced was specific to architecture. By definition, architects typically think more spatially than verbally. "Sometimes it's hard enough just to communicate what we're thinking in person," says Morgan. "Often when we're describing a project, we have to talk with our hands or draw it out. Trying to explain something visual on the phone, or even through videoconferencing, just isn't the same."
But most of the misunderstandings that the Cuningham Group experienced could happen in any company. For instance, the staff from the remote offices bristled when anything came down by fiat from the mother ship. At first the company tried to handle all its marketing from the Minneapolis office, but that quickly proved problematic, partly owing to response speed but mostly to miscommunication. The Phoenix and Los Angeles offices were used to putting together their own marketing materials and felt their talents and responsibilities usurped. Marketing and communications director Kathy Tait took a hard line initially. "We said, 'No, you can't,' for a while," she says. "But we've since found that that doesn't work very often." Part of the problem was unfamiliarity. "Before we got to visit them, it was, 'Jesus, what are they doing?" says Tait. "But when we got to visit them, suddenly it was, 'Holy cow, they have the same problems we do." Tait quickly developed enough confidence in the skills of the Phoenix and Los Angeles staffers to let them put together their own proposals. "The challenge was figuring out how to make it work and keep the message consistent," she says.
"We're all pretty much a knit-shirt crowd. Up there in Minneapolis you have some pretty tightly knotted ties," says Rick Solberg.
In general, communication seemed to work fine at the management level, but it didn't always make it down to the rank and file. The partners' eminently good intentions were often misinter-preted. According to Morgan, "The biggest thing that caused problems, and still does, is the fear that comes from not knowing what's going on." The grand corporate vision that the partners evoked in their retreats wasn't always apparent to the ones who had to stay home. Cuningham and his partners took advantage of every opportunity they could to shuttle people from office to office, but not everyone got the chance to move around. "We had to strike a balance between nurturing the culture, which does take investment, and being strategic about our discretionary spending," says Solberg.
Most of the staff members of the Cuningham Group agree that the bumps they encountered were pretty much unavoidable. No matter how well you plan or how thoughtfully you approach the process, something unanticipated is always going to happen. And for the staff the benefits certainly have outweighed the pain.
Among the rewards of the merger that the Cuningham Group enjoyed was significant staff growth. Since the summer of 1996 the Phoenix office has grown to 20 people, up from 6; Los Angeles has grown to 50 people, up from 12; and Minneapolis has grown from 100 to 130. Solberg says, "There's no way that could have happened without the merger," even with the recent unprecedented growth in the national economy. "We're landing far more lucrative projects," says Cuningham. "We're seeing bids with nine figures now instead of seven or eight."
What's more, the firm has been able not only to expand into other markets but also to penetrate deeper into the markets it already served, which the company's numbers are starting to reflect. Although in 1999 the Cuningham Group still wasn't able to resume contributions to the employee profit-sharing fund, as of January the firm had already written contracts for $22 million in 2000 and was projecting a minimum profit-sharing contribution of $150,000. "We've never before begun a year with our revenue target already under contract," says Cuningham. "And we usually get 20% to 40% more work if we just sit here and look out the window." Which means revenues of $30 million in 2000 would not be out of reach.
The merger process also forced the company to develop better systems for accounting, design, and knowledge management. And it compelled the company to formalize programs that had been ad hoc, like mentoring and self-directed learning. "We needed that discipline," says partner and vice-president John Hamilton. "I don't think we would have done those things if we hadn't been challenged by the other offices' asking, 'How do you guys do that there?" The downside to that increased rigor has been a certain loss of spontaneity. "Some of the fun is gone," says Cuningham. "Can we have structure and have fun? That's been tricky. The parties are different; there's sometimes this feeling you have to go."
Balancing that loss of spontaneity is the excitement of working on a national scale. Many Cuningham Group employees have taken advantage of the chance to relocate, experience other cities, and work on projects with cool big-name, high-image architects. Sarah Stahl, interior designer in the Minneapolis office, has spent time in Los Angeles and has worked on projects with famed architect Frank Gehry's office, as well as hot visual-effects house Digital Domain. "That was a huge learning opportunity," she says. "Here I am, this kid from the Midwest. I thought that was a pretty big stretch from what I could get in the Twin Cities."
As for Cuningham, he says, "Being on the national stage is heady, a dream come true, but I can't say that it's made life easier. It's certainly more interesting." He says one particularly sobering discovery for him has been the amount of traveling it has taken to oversee three geographically dispersed offices. "I thought I'd be traveling maybe two or three times a year," he says. "But it's been 70,000 miles a year for the past three years." Still, that hasn't put him off thinking about other possible mergers in the future. "We've talked about other areas where we want to be regionally," he says. "And unless people are willing to make the move, that means finding somebody there to acquire."
If that happens, nearly all the folks at the Cuningham Group agree that the one element they'd never enter such a transaction without is totally open communication. "You can't hold anything back," says Solberg. "Chances are, what you're concealing will be the problem." The key to the successful merger of Solberg + Lowe with the Cuningham Group was each party's ability and willingness to open up completely to the other party -- and to the staff. And that means warts and all. "Better to find out today than after you've already completed the transaction," says Solberg. It's a process that Solberg, Cuningham, and company are still working on. "We keep confronting each other, finding out and sharing more," says Solberg. "Ultimately, the more you do to confront possible problems up front, the less you're going to get hurt."
Christopher Caggiano is a senior staff writer at Inc.
Partners of the Cuningham Group in Minneapolis and Solberg + Lowe in Los Angeles visit each other's offices.
The two firms work together on some trial hotel projects.
Cuningham Group holds January holiday party in Minneapolis, including Solberg + Lowe staff, spouses, and significant others flown in from Phoenix and Los Angeles.
Partners go on a three-day management retreat in Keystone, Colo.
Merger papers signed; company celebrates first annual "Interdependence Day."
Cuningham Group announces no profit sharing.
Since the merger, the Cuningham Group has expanded from 118 employees to 200. Still no profit sharing.
Company has already signed $22 million in projects for year 2000 and expects $30 million in annual sales and a contribution of at least $150,000 to profit sharing.
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