9-404-116 REV: AUGUST 8, 2005 THOMAS J. DELONG DAVID L. AGER Utah Symphony and Utah Opera: A Merger Proposal In late June 2002, Anne Ewers, general director of Utah Opera (UOC), sat reviewing costume sketches for an upcoming performance of Giuseppe Verdi’s Otello. In less than two weeks the Boards of UOC and the Utah Symphony would vote on whether to merge the two organizations. The outcome of the vote, if positive, would have a significant impact on Ewers, who had been asked to assume the helm of the merged entity and lead the integration effort. A weakening of the economy, the bursting of the Internet bubble and subsequent collapse of the stock market, and the tragic events of September 11, 2001 had led to a decline in public (e.g., government subsidies) and private (e.g., ticket sales and individual, corporate, and foundation pledges) support for the arts. This trend had significantly hindered an already financially strapped arts community across the United States and had left many arts boards of directors scrambling to devise means to replace lost revenues in an effort to maintain the solvency of their respective organizations. Salt Lake City was no exception, and board members of many local arts organizations were laboring to preserve the arts in Utah. In response, senior board members of the symphony and the opera and Ewers engaged in a series of private conversations to consider the idea of merging Utah’s top two arts organizations in an effort to economize on costs and perhaps expand the artistic potential of the two organizations. The outcome of these conversations was a decision to convene a joint task force1 to further study the idea of a merger between what many argued were two of Utah’s greatest cultural assets. Ewers, who had a reputation among the executive committees at the opera and the symphony for being energetic, enthusiastic, and capable, had been asked whether she would be interested in becoming the CEO of a merged organization. At first she was cautiously excited about the opportunity, but as the months passed and the public, various board members, staff members, and artists began to express skepticism about and openly oppose the merger, Ewers recognized that combining the two organizations represented a much greater challenge than she had initially realized. 1 The task force consisted of members of the executive committees of the symphony and the opera—three from the symphony, three from the opera, and one person who sat on both executive committees—and Ewers. ________________________________________________________________________________________________________________ Professor Thomas J. DeLong and Ph.D. Candidate David L. Ager prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 404-116 Utah Symphony and Utah Opera: A Merger Proposal The opera and the symphony boards were each scheduled to vote on the merger on July 8, 2002, yet by late June 2002 it was still unclear which way the vote would turn. Ewers was excited by the challenge of leading the merged organizations and the integration effort, but she knew that she needed a well-thought-out plan for how she would integrate these cherished arts organizations. Ewers’s reverie was broken when the costume designer arrived with the fabric samples for Otello. Still, the question lingered in her mind: How would she realize the synergies that justified the merger? Arts Organizations in America2 Unlike major arts organizations in Europe and Canada, which relied heavily on government agencies for their funding, orchestras, opera companies, theater companies, and other arts organizations in the United States operated according to a very different financial model. A relatively small portion of total income (approximately 6% in 2000–2001) came from federal, state, and municipal governments (tax-supported income); the majority of income was generated through ticket sales and individual contributions (earned income—approximately 46%), business and foundation giving (private income—approximately 36%), and endowment and investment income (approximately 12%). Even before the economy had begun to soften in 2000, many arts organizations across the country had attempted to increase revenues by adding more performances. Once a performance (play, opera, concert) had been rehearsed, there was little incremental cost to the organization to present an additional show. This was particularly true of symphony orchestras, which between the 1995–1996 and the 2001–2002 seasons had increased the total number of performances nationwide by 23%, to 37,000 concerts. Although this increase had corresponded with higher total symphony attendance (in excess of 30 million seats for the 2000–2001 season), the tragic events of September 11th combined with the downturn in the economy led industry experts to forecast that attendance in the 2001–2002 season would be down by at least 4% from the previous year. Similar forecasts were being made for attendance at other arts events such as the theater, opera, and ballet. To compensate for the decline in attendance, ticket prices for the symphony had been increased, and total income for the industry was expected to increase by approximately 1%; however, total expenses were expected to increase by at least 2.5%, leading a majority of the orchestras across the country to predict an operating deficit for the 2001–2002 season. In addition to the decline in attendance, several other factors had contributed to the forecasted deficit. Declines in public subsidies, particularly at the state level, as well as a decrease in endowment and investment income threatened the financial viability of many orchestras. Endowment and investment income had become particularly thin due to a depressed equities market that had lost up to one-third of its value since January 2001. State and local tax revenues used to subsidize orchestras had also stagnated, leading appropriations to arts agencies to decline. The prediction was that such decreases would continue. In addition, the number of arts organizations seeking public funding had increased, thereby further decreasing the size of appropriations to individual organizations. 2 This section draws on Douglas J. Dempster, “The Wolf Report and Baumol’s Curse: The Economic Health of American Symphony Orchestras in the 1990s and Beyond, ” Harmony, Forum of the Symphony Orchestra Institute, 2002. 2 Utah Symphony and Utah Opera: A Merger Proposal 404-116 Utah Opera The late Glade Peterson, a native of Utah and renowned operatic talent in Europe, formed Utah Opera (UOC) in 1976. The new company presented its first opera, Puccini’s La Bohème, in 1978. UOC was committed to staging opera productions, to promoting broad public knowledge and appreciation of opera, as well as to creating opportunities for promising young artists to develop their talents and to pursue careers in opera. Peterson served as general director of UOC until his death in 1990. The following year, Ewers was named general director of UOC. Under her direction, the opera continued to grow, increasing its number of annual productions from three to four. UOC attracted an annual audience of approximately 130,000 patrons from Utah and neighboring states to its performances at Salt Lake City’s Capitol Theatre. In addition to its regularly scheduled productions, UOC staged performances for over 70,000 students3 throughout the state in an attempt to increase their appreciation for opera and also to ensure UOC’s future audience base. UOC had a permanent staff of 23 people (refer to Exhibit 1 for the organizational chart) engaged in administrative functions such as the technical and artistic elements of opera production, music administration, and community education. The artists, including soloists, artistic team, chorus, ensemble, and orchestra, were each hired for a specific production. With the exception of the soloists, most of these artists were locals. In the case of the orchestra, UOC engaged the services of the Utah Symphony. In addition to ticket sales, financial support for the opera was obtained from locally and nationally based foundations, corporations, and individuals: The National Endowment of the Arts, the Utah Arts Council, the Utah State Legislature, the Salt Lake City Zoo, the Arts and Parks Fund (ZAP), and the Salt Lake City Arts Council. The UOC endowment fund had grown to $5 million by January 2002. The UOC owned production studios on 2.9 acres of land and a sizable costume inventory (including 17 sets and 38 productions of costumes). These latter assets were valued at approximately $4.8 million. (Exhibit 3 presents financial data for UOC.) Anne Ewers Ewers was hired in 1991 to lead UOC. Prior to coming to Salt Lake City, Ewers had served as general director of the Boston Lyric Opera, where she retired a $450,000 debt that she inherited from her predecessor, built an endowment fund, and increased the number of productions from one to three. Ewers had also served as assistant director to the San Francisco Opera and the Canadian Opera Company, but it had been through her work directing operas that Ewers earned her early reputation in the opera community. Over the course of her career, she had successfully served as stage director for over 60 opera productions across the United States and abroad, including for the San Francisco Opera.