By: Greg Burns and Susan Chandler, Tribune staff reporters

October 22, 2006, Chicago Tribune

It's the business equivalent of the Chicago Bears merging with the Green Bay Packers, or Jay Leno and David Letterman combining their talk shows.

The Chicago Mercantile Exchange and Chicago Board of Trade, at each other's throats for generations, stand to become a single enterprise in a matter of months. Amid the honeymoon glow that followed last week's announcement of their proposed $8 billion merger, optimism reigns that these two opposing cultures will find a way to work together.

Yet the business world is littered with cultures that failed to mesh in the aftermath of a deal. Merger partners often clash and fall out, from the ill-fated marriage of Internet giant AOL with old media conglomerate Time Warner, to the tempestuous combination of investment banker Morgan Stanley with middle-market broker Dean Witter. Tribune Co., owner of the Chicago Tribune, continues to struggle with cultural issues from its acquisition of Times-Mirror Co. six years ago.

Combining operations and lining up behind new leadership inevitably brings challenges. The history of jealousy and suspicion between the newly dominant Merc and its patrician crosstown rival makes those routine pressures all the more combustible.

There has to be resentment about the longtime No. 2 acquiring the Board of Trade, the industry's No. 1 player from 1848 until just a few years ago, say observers.

"People were saying the other morning, `Can you imagine the Hatfields and the McCoys sharing the same break room or rest room?'" noted Rick Santelli, who has been a member at both exchanges and now reports from both for CNBC. "The CME always was considered the second dog. They got the final little snicker in the same way the White Sox did by making it to the World Series first."

Complete harmony is probably too much to expect from these rough-and-tumble institutions.

"There's going to be unhappy players," predicted David Kalt, chief executive of OptionsXpress, a Chicago brokerage firm. "People who had huge influence will no longer have that influence."

Still, both sides have structured the deal to defuse some obvious flash points. They already have announced who will run the combined exchange and decreed that the Merc's trading pits eventually will migrate to the Board of Trade building. The moneymaking potential should easily overcome any remaining cultural differences, Kalt said.

In a demonstration of widespread support that would have been unthinkable in the 1980s or `90s, Board of Trade Chairman Charlie Carey got a standing ovation last week when he walked into the soybean trading pit at his exchange to explain the deal with the former foe. Carey predicts the new order will make so much business sense that the grudges of yesteryear will be forgotten as the profits pour in.

"I don't see a lot of downside," he said.

Going public changed everything, say players at both exchanges. It shifted the balance of power from the membership "seat" holders to a new group of public shareholders and cemented computers as the preferred trading vehicle. It also showed just how much equity value these exchanges had left untapped because of the parochial thinking of the past.

As industry veteran Z. Lou Gutman put it, "Even the die-hards on the floor realized times were changing."

Traders, in general, tend to be competitive and aggressive. They are Type A personalities, with a tolerance for risk that would drive most people crazy. But between the Board of Trade and the Mercantile Exchange, it was the Merc's leadership that had the reputation for taking more chances, experimenting with technology and launching more innovative contracts.



Enmity fading

For traders in their 60s and older, the rivalries were intense.

"The grain traders didn't like the meat traders, and the meat traders didn't like the grain traders," said Jack Bouroudjian, a veteran Merc trader. They drank at different bars, belonged to different clubs and many celebrated different holidays.

But those differences no longer seem to matter to members of his generation, said the 45-year-old Bouroudjian. Among young traders in their 20s, such old-school enmity is "non-existent," he said. "They can't even distinguish between the two cultures. Whether they merge or not, culturally they've blended into one, big financial-futures melting pot."

Electronic trading has much to do with that evolution, traders say. Orders flowing onto computer screens have superseded the jostling and flying elbows of the open-outcry trading method.

The result is that exchanges have become less vulnerable to culture clashes than other, more people-intensive businesses, since they now serve primarily as technology platforms.

If all goes as planned, and the Merc and the Board of Trade come together by mid-2007, it's easy to predict which culture will prevail. Merc shareholders will own 69 percent of the combined company, and its management will run the exchange.

"Whoever comes to the game with the most money, that organization will dictate what the end solution looks like," said Adam Hartung, managing partner at Spark Partners, a strategic consulting firm in Long Grove. The Merc veterans will control how resources get allocated and what types of performance get measured, Hartung said.

At least some of those who don't like the new way of doing things will try to exert their influence, organizational experts say. That can be dangerous if the disaffected folks create an "us versus them" atmosphere and seek to perpetuate bad feelings between the two groups, warned Ranjay Gulati, professor of strategy and organizations at the Kellogg School of Management.

"It can get in the way. You start to stereotype people. It inhibits internal organization and cooperation," said Gulati, an expert in building alliances.

Consequently, leaders of the newly merged company need to ensure the two groups bond, even if it's through largely symbolic gestures such as creating a new joint logo. And they need to do it as soon as possible.

"Clearly what is important is decisive actions. Otherwise, it can get really messy, really fast," Gulati said.

Already, Board of Trade and Merc leaders have taken important steps to avoid rekindling the fiery conflicts of the past. Under terms of the merger, access to existing products in the open-outcry pits will be limited to members of the exchanges trading them now. So meat traders won't be able to walk into the grain pit or vice versa.

"It's important for the completion of the transaction to calm the fears of anybody involved in that part of the business," explained Carey, the Board of Trade chairman.

Moving the Merc's open-outcry operations to the Board of Trade building at 141 W. Jackson Blvd. also will help allay fears, Carey said. It makes financial sense since the building is owned by the exchange, while the Merc leases its Wacker Drive trading facility. In addition, moving similar products side by side provides new trading opportunities.



Board shareholders keep `voice'

The composition of the board of directors of the combined company is designed to build trust as well. At 29 members, it far exceeds the standard for good corporate governance but has the advantage of enabling the Board of Trade to designate nine directors, sending an unmistakable message to its shareholders: "You still have a voice in governance. You're still a part of it," said Carey, who will serve as vice chairman.

Even adopting an awkward new moniker--CME Group Inc., a CME/Chicago Board of Trade Co.--reflected the effort to avoid antagonizing the old guard. Besides enabling the Merc to take advantage of a strong brand in the futures industry, Carey said, "It deals with the sensitivities of those concerned with the loss of the name."

In the end, those efforts to smooth the path toward integration of the two Chicago institutions will rise and fall on whether the merger continues to pass financial muster.

The transaction still could fail to win approval if the stocks decline, and shareholders decide they would be better off remaining independent, said Jake Morowitz, a Board of Trade veteran. "It's a question of what they're going to get out of the deal."

As of Friday, the economics looked rich: The Board of Trade closed Friday at $144 per share, up from a 52-week low of $79, while the Merc finished at $490.18. That's miles above its 2002 initial public offering price of $35, but if Merc stock were to fall sharply, the value of the deal for Board of Trade members would fall with it.

Still, even if a private-equity firm, European exchange or other new bidder appeared with a slightly better offer, the familiarity that so often bred contempt in the past could work in favor of the Merc this time, Morowitz said.

"I'm willing to take a slightly lower price from the Merc," he said. "Everybody in their hearts prefers the Merc to the other cast of characters. This is the devil I know, not the devil I don't know."