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."