In a common theme of organogenesis, certain cells within a multipotent epithelial sheet exchange signals with their neighbors and develop into a bud structure. Using hair bud morphogenesis as a paradigm, we employed mutant mouse models and cultured keratinocytes to dissect the contributions of multiple extracellular cues in orchestrating adhesion dynamics and proliferation to shape the cluster of cells involved. We found that transforming growth factor beta2 signaling is necessary to transiently induce the transcription factor Snail and activate the Ras-mitogen-activated protein kinase (MAPK) pathway in the bud. In the epidermis, Snail misexpression leads to hyperproliferation and a reduction in intercellular adhesion. When E-cadherin is transcriptionally down-regulated, associated adhesion proteins with dual functions in signaling are released from cell-cell contacts, a process which we demonstrate leads to Ras-MAPK activation. These studies provide insights into how multipotent cells within a sheet are stimulated to undergo transcriptional changes that result in proliferation, junctional remodeling, and bud formation. This novel signaling pathway further weaves together the web of different morphogens and downstream transcriptional events that guide hair bud formation within the developing skin.