Tuesday, August 08, 2006

The Deal's featured article is on Chicago's economy

Check out a comprehensive review of Chicago's industries and economy from the Deal.

Welcome to Chicagoland
by Matt Miller Posted 08:04 EST, 3, Aug 2006

In 1997, born-and-bred Southerner Don DeLoach, his large family in tow, moved to Chicago to take a job with database giant Sybase Inc. Two years later, when DeLoach quit to head a Charlotte, N.C.-based software startup called YOUcentric Inc., his wife and seven children refused to leave. So he commuted. After YOUcentric was acquired by J.D. Edwards & Co. in late 2001, DeLoach listed three criteria for his next job: The company had to possess fantastic technology. It had to have strong growth potential. And it had to be based in Chicago.

Chicago? The Windy City? The Second City? The city of stockyards, Al Capone, the 1968 Democratic convention, the frozen Monsters of Midway? "I had a terrible view of Chicago before we moved," DeLoach, now 45, recalls. "What happened was unbelievable. We fell in love with the place."

DeLoach is now president and CEO of Aleri Inc., which provides state-of-the-art stream-processing technology for financial services. Aleri resulted from a 2002 merger between a London and a New York concern. The headquarters of the combined company was originally planned for New York City, but DeLoach got his wish. He now looks out over Lake Michigan from his corporate offices in a downtown Chicago high-rise.

Aleri's 45 Chicago-based employees won't make or break the local economy. But the kind of high-tech company Aleri represents is critical for the city's future. Then there's DeLoach's unabashed exuberance for his surroundings, sentiments that are echoed in conversations all across Chicago. Indeed, this ubiquitous form of Chicago boosterism explains the source of the city's congenital optimism, despite some economic hits this decade.

"I don't want to leave. I don't know many people living in Chicago who do," says Richard Kaye, a native Chicagoan and executive vice president of Hilco Organization, a diversified group of companies based in Northbrook, Ill. That sentiment is true of both individuals and businesses, he adds. "Companies don't need to be based in Chicago. They want to be."

While Chicago may lack New York's flash or Los Angeles' pizzazz, it exhibits an understated, stolid confidence. Says Thomas Allison, executive vice president and senior managing director of Mesirow Financial Consulting LLC, a veteran banker and a former Chicago cop: "There's a tremendous amount of pride in the city."

For good reason. In the 1990s, Chicago successfully reinvented itself, reducing its dependence on manufacturing and solidifying its reputation as a center for transportation and professional and business services. The city is home to many of the country's major consultancies and six of the 15 largest U.S. law firms. Other economic activities boomed in the '90s as well: tourism, some technology, pharmaceuticals, certain kinds of financial services.

Chicago is often described as a post-industrial metropolis, Carl Sandburg's "player with railroads" and "city of the big shoulders" transformed into a jet-setting options giant and a city of broadband. Chicago's blue-collar foundation may now be more romantic myth than reality. But part of what gives Chicago its immense strength is its ability to maintain some of the old while encouraging the new. The city retains its traditional role as capital of the Midwest while attempting to foster a global outlook, reach and business environment.

"We're a generation away from being a manufacturing and blue-collar city, and you can feel that we're becoming international," says David Kalt, CEO and co-founder of the online options brokerage optionsXpress Holdings Inc. Yet "there's something grounding about being in Chicago. … There's a nice balance."

The goal, as Federal Reserve Bank of Chicago senior economist Bill Testa puts it, is to become "the Midwest's portal to the globe." Chicago's success, ultimately, is tied to a kind of economic inclusiveness.

Chicago isn't there yet. According to Testa, who often appears to serve as the city's economic doubting Thomas, the metropolitan region retains unhealthy links to Midwestern markets, many of which are suffering. Chicago job growth this decade, he notes, has been tepid and half the national average.

Gone are many of the manufacturing stalwarts that defined the city and its skyline during the 20th century: International Harvester Co., Pullman Co., Republic Steel Corp., Crane Co. In their places have arisen insurance giant Aon Corp., lodging company Global Hyatt Corp., consultancy Accenture (which split from another long-term Chicago institution, now defunct: accountant Arthur Andersen).

"The old skyscrapers reflected an industrial-oriented city," says Timothy Gilfoyle, an urban historian at Chicago's Loyola University, as he gestures toward the city's best-known thoroughfare, Michigan Avenue. "The new ones are service-oriented, leisure-based."

Yet, there's a certain constancy. "Much of the industry we have, whether in the service sector or traditional manufacturing, goes back to simple geography," says Robert Ray, senior vice president of business development for the Chicago Board of Trade. "We're the crossroads in the nation. We can't ever escape that."

Indeed, Chicago remains America's premier distribution center, even if aircraft and semis have long since supplanted railroads. More containers move through Chicago than any other port in North America.

Manufacturing, especially in the city proper, has declined precipitously. But that doesn't mean the metropolitan area is devoid of industry. Allison describes a Chicago-area friend who started a business buying and selling scrap steel. In two years, revenue hit $20 million.

Underpinning the Chicago story is an amazing variety of businesses. Chicago's economy is broader based than any other metropolitan area in the U.S., a Moody's Investors Service Inc. study shows. That means that while Chicago hasn't undergone Silicon Valley-type booms, it's better situated to withstand the inevitable busts, because it's not dependent on one, two or three sectors. "Chicago doesn't experience big mood swings, except maybe over the White Sox and the Cubs," says Kaye.

Not that Chicago has completely escaped tough economic times. A quarter century ago, rust-belt decline, exacerbated by high oil prices, hit the city hard. High unemployment, decay and urban flight followed.

And today the economic forecast isn't all blue skies and cool breezes. Chicago experienced some difficult years earlier this decade and has yet to fully recover. The telecom collapse and the downturn in air travel hit hard, as did the Web bust.

The Chicago Business Activity index indicates that the metropolitan economy has registered modest growth over the past two years and will continue to grow. However, data gathered by University of Illinois' Regional Economics Applications Laboratory predicts jobs in the state of Illinois, which is dominated by Chicago, won't eclipse their previous November 2000 peak until October 2008.

Even in terms of its service sector, the metropolitan area remains tied in some measure to Midwest manufacturing, much of which is flagging and some of which — auto manufacturing, for one — is on life support. "Chicago, after some heady times in the '90s, went down apace with the Midwest," says Testa.

According to figures compiled by Testa, the city itself lost some 270,000 manufacturing jobs from 1977 to 2004.

The metropolitan area made a remarkable effort to replace those jobs. Chicago ranks second in terms of housing the headquarters of Fortune 500 companies. But much of the economic growth stems from the myriad of small and midmarket companies. "There's a churning of Fortune 500 companies — there always has been a churning," says Frank Beal, the managing director of Chicago Metropolis 2020, a civic organization. "The real growth in the economy comes from smaller firms. The key is how we nurture them, encourage them."

"There's a ton of entrepreneurs who started here, grew here and now have a client base all over the world," says Robert Labate, a Chicago-based partner with Holland & Knight LLP. "It makes us resilient. There's continuous regeneration."

Chicagoland is a geographic and an economic behemoth. The metropolitan region encompasses 74 towns and cities, stretching from Wisconsin to Indiana. Metropolitan Chicago's gross domestic product should top $400 billion this year, based on estimates compiled by the U.S. Conference of Mayors. Only the New York City and Los Angeles markets are larger.

Like other American metropolises, Chicago has witnessed the suburbanization of its economy. Greater Chicago is dotted with cookie-cutter office complexes and industrial parks that arc around the city. Motorola Inc. is in Schaumburg, Ill., Allstate Corp. is in Northbrook, and Kraft Foods Inc. is in Northfield. Fortune Brands Inc. is in Deerfield. Abbott Laboratories is in Abbott Park. McDonald's Corp. occupies a campus in Oak Brook. Chicago residents routinely bemoan the perils of a punishing reverse commute, out to the suburbs to work, back to the city to live.

Chicago's heart, however, remains decidedly urban. And it's not just a question of the Bulls, the Bears, the Cubs, the White Sox or, for that matter, the Chicago Symphony or Lyric Opera. The city engenders inclusion. "Everyone is invested in and has an interest in downtown, poor or rich," says Lisa Johnson, an associate with Holland & Knight. "There's very little, if any, city-suburb animosity," adds John Schmidt, a partner with Mayer Brown Rowe & Maw LLP. Suburbanites "feel part of the city."

The city itself feels flush and self-confident. Few deny that longtime Mayor Richard M. Daley, who has been in office 17 years, is a guiding force, like his autocratic father, who presided over the city for 21 years. Publicly, just about everyone sings his hosannas, both in terms of the city's physical vitality and its friendliness toward business. "He's the single most important element of the city," declares Schmidt.

Privately, however, some, at least, call Daley petty, autocratic and vindictive. Last month, the mayor's former patronage chief and three other officials were convicted of corruption. Daley said he was unaware of what was going on, although the convictions prompted whispers that the mayor may not run for re-election next year.

While historians warn that it's a stretch to compare the Chicago of today with the city's gilded age a little more than a century ago, there clearly remains some of that same bedrock belief in the manifest ability of the city to prosper. Construction cranes now loom over a Trump International Hotel and Tower project, an addition to the Art Institute, a CBS broadcast center. Theaters have been spruced up. Restaurants, clubs and galleries are popping up.

A mix of large and small companies occupy towering skyscrapers and spiffy lofts. Last month, UAL Corp., parent of United Air Lines Inc., announced that its headquarters would remain in Chicago and it would move from the suburbs to a Wacker Street high-rise, just around the corner from Boeing Co.'s head office; Boeing famously relocated from long-term home Seattle a few years back. "Downtown is a conglomerate of uses, a conglomerate of activities, a conglomerate of enthusiasts," says Steven Elrod, the managing partner of Holland & Knight's Chicago office.

Trendy residential and commercial enclaves have also transformed once-blighted neighborhoods as gentrification spreads. Ride the Chicago Transit Authority's Green Line from the downtown Loop three miles south to the Illinois Institute of Technology and this transformation becomes evident. One of the last of the city's notorious public housing projects stands nearby. Others have been recently cleared. Just south of the campus, construction is beginning on a huge multi-income residential development called Park Boulevard, site of what was once one of the worst projects. Newly planted trees line formerly barren streets.

A decade ago, the institute's board considered moving the campus to the suburbs. Now the institute itself is undergoing both a growth spurt and a beautification campaign. The train literally travels on top of the school's campus center, a Rem Koolhaas-designed building opened three years ago that turns elevated tracks into a stunning design element. Last year, the school renovated S.R. Crown Hall, one of the masterpieces of modernist architect Ludwig Mies van der Rohe, who once headed the institute's architecture school. Work began earlier this year on a $50 million technology business center. A $6 million technology incubator opened late last year. Its first tenant, All Cell Technologies LLC, which hopes to commercialize lithium-ion battery technology, picked up $1.25 million in angel funding in June.

"We've created a little college town," says Marlis Broadhead, who until last month was the school's spokesperson. "We couldn't have done this five or six years ago."

Closer to downtown, dozens of residential projects line streets stretching south, north and west from the Loop. For-sale signs are plastered on $500,000 condominiums, where decrepit warehouses and seedy offices once stood.

Chicago in recent years avoided the kind of housing booms and busts that shook the coasts. The city's cost of living pales in comparison to New York or San Francisco. But the kind of effervescence now bubbling up could lead to oversupply, some bankers warn, especially in the more expensive condo market. An array of residential skyscrapers is rising on land just north of the city's main Grant Park. Lakeshore East, alone, will add nearly 5,000 units when completed by 2015. Developers have estimated the cost at $4 billion. Three buildings have been completed. Two more are due next year.

"It used to be no one wanted to live downtown, says Schmidt. Now "living along Grant Park is equivalent to living along Central Park."

As its name implies, Lakeshore East is perched on the edge of Lake Michigan. America's largest body of fresh water serves as a dramatic backdrop to Chicago's urban landscape. What once gave the city its water-borne access to the East is now the site of a multibillion-dollar recreational industry.

Chicago's transformation isn't limited to either downtown high-rises or megacorporations. Take Jay Sharman and his sports media-production company, TeamWorks Media Inc. The company occupies part of what was once an early-20th-century coffin factory. Sharman, who co-founded the company and serves as CEO, is perched along with 35 other employees a block from the city's old meatpacking district. It's in the West Loop, an area of Chicago that 10 years ago wasn't safe to wander into after dark. Now it's a neighborhood of hot restaurants, fashionable art galleries and expensive condos, modeling and casting agencies, not to say Oprah Winfrey's operation. "It's thriving," says Sharman. "There's a cool factor to it."

The same could be said of TeamWorks. Sharman and three partners seized on the idea of a full-service sports marketing company, which includes television production, Web design and marketing. They attracted some local customers such as the Chicago Bulls, Wilson Sporting Goods Co. and the Big Ten collegiate athletic conference. They now boast of doing work for ESPN Inc., Comcast Corp. and the National Basketball Association. TeamWorks has witnessed double-digit growth each year, Sharman says. While he declined to make revenue figures public, they're in the single millions, he says, and "hopefully beyond that" by the end of the year. TeamWorks is now in the process of spinning out its IT division into a separate company. "TeamWorks embodies the new Chicago economy," says Labate, the company's outside counsel.

Chicago is full of such stories. Kalt, who had designed software for the travel industry, and two other partners inaugurated optionsXpress in 2000. They figured there was a need for that kind of brokerage and that a Chicago base meant "we were close to the people who make the decisions" in the options market. They shunned early-stage financing, depending instead on friends and family. Summit Partners provided later-stage financing. OptionsXpress developed its product, launched it and quickly gained profitability. The company went public in January 2005. For the three months ended June 30, 2006, net income totaled $18 million, on revenue of $47.3 million. The company now has more than 200,000 accounts.

"We weren't afraid to take that first step. You feel that in Chicago," says Kalt, 39. "There's a culture here. It's roll up your sleeve, and get things done. It's very solid."

Moody's 2003 economic diversity study ranked Chicago first among 318 cities. (By contrast, Los Angeles ranks 60th and New York 69th.) A list of Chicago's Top 100 companies is all over the map. Industrial fasteners and components company and perennial acquirer Illinois Tool Works Inc. ranks next to insurance giant CNA Financial Corp., which stands next to healthcare stalwart Baxter International Inc. "Chicago's economic diversity has served it well over the past decade," says Cary Kochman, Chicago-based co-head of mergers and acquisitions for UBS.

The melding of old and new is on display in an art deco landmark at the foot of LaSalle Street in the city's financial district. On Aug. 1, Chicago's Board of Trade lit up its electronic trading board. For the first time in its 158-year history, the board is offering an alternative to open outcry for its agricultural futures contracts. Huge plasma screens now ring the trading floor, with its distinctive octagon-shaped pits. Next door, in a building that can easily accommodate a 747, traders deal financial options. CBOT now claims 80% of the world's turnover of treasury options. The exchange launched precious metals futures trading in 2005 and now boasts more than 40% of the options market.

Periodically, New York has attempted to grab some of Chicago's options trade. It's failed. A few years back, the German Eurex exchange linked with a New York affiliate to capture some of the trade. "No success," says CBOT's Ray.

At one point or another, conversations tend to almost inevitably veer toward a comparison between Chicago and New York. There's some defensiveness here, mixed with pragmatism. "There's no denying we're the second city," says David Heller, a Chicago-based partner with Latham & Watkins LLP and co-chair of the firm's insolvency and restructuring group. "We're second to New York, but we're an exciting second."

Even the city's biggest boosters admit Chicago can't always hold its own. The track record in M&A has been mixed, as has its impact on the city. After BP plc and Amoco Corp. merged in 1998, for example, the headquarters moved to London. But it was "more an issue of civic pride and less an issue of a hole in the economy," says Elrod.

Green Bay, Wis.-based WPS Resources Corp., on the other hand, has agreed to pay $1.5 billion for Chicago-based Peoples Energy Corp. but has said it would move its headquarters to Chicago if the deal is approved by shareholders and regulators.

Some defeats sting more than others. With its ornate clock tower and distinctive Tiffany Glass ceiling, the Marshall Field's department store on State Street, in the heart of the downtown Loop, is a Chicago icon. It's second only in size to Macy's Herald Square New York store. Federated Department Stores Inc. acquired Marshall Field & Co. as part of its $17 billion acquisition of May Department Stores Co. in 2005. Next month, the Marshall Field's nameplate is scheduled to come down. Macy's is going up.

Perhaps the most dramatic change has come from financial services. What that's meant is a matter of debate. While many bemoan the lack of homegrown commercial banks, others maintain that the city's concentration of private equity, hedge funds and corporate financiers serves Chicago well. "It's on the cutting edge of global financial innovation, even though it doesn't serve as headquarters of 10 commercial banks," says Kochman.

The biggest money center banks have disappeared, had their identities shift or have undergone ownership changes. The Continental Illinois Building is now Bank of America Corp., the result of a 1994 acquisition. J.P. Morgan Chase & Co. signs now hang from what were once First National Bank of Chicago offices. In 1998, First Chicago NBD Corp. merged with Banc One Corp. to form Bank One Corp., which in turn was acquired by J.P. Morgan Chase two years ago. It probably doesn't mean much to Chicagoans that Bank One chairman Jamie Dimon is now running Chase — in New York City.

Add to that the fickleness of out-of-town financial institutions. Citigroup Inc. several years back decided to shut down its Chicago-based leveraged finance operation completely. "It was a downer," admits Heller.

The mergers often brought dislocation, job loss and distraction, but not always. What is now Netherlands-based ABN Amro Bank NV acquired locally owned LaSalle Bank more than two decades back. LaSalle, in turn, acquired other regional banks; most notable was the $1.9 billion purchase in 1997 of Detroit-based Standard Federal Bancorp.

LaSalle now claims that it's the largest Chicago-based bank. It's a big force nationally in the middle market and is one of the country's largest real estate lenders. Because the Dutch allowed Chicago-based management to run the show, there's a sense of belonging. Bank chairman Norman Bobins is the closest Chicago has to a banking baron. "Even though we're owned by ABN Amro, we're viewed as a Chicago name, a Chicago institution," says Michael Sharkey, president of LaSalle Business Credit LLC, a unit of the bank.

LaSalle's image in Chicago transcends signs and ATM machines. It involves itself in a wide variety of civic activities from the newly renovated and renamed LaSalle Bank Theater (formerly the Schubert) to the LaSalle Bank Chicago Marathon. That level of activity doesn't surprise Beal, a former steel executive. "This is a business culture that absorbs the newcomer and says part of your responsibility requires participation in civic affairs," he says.

Nowhere is that more evident than in Millennium Park, a new civic centerpiece that resulted from a public-private partnership. LaSalle Bank's name, along with 19 other corporations, 12 foundations and 56 individuals, is inscribed on the park's peristyle. The list represents old Chicago money and new, hedge fund managers and mall owners. Together, they donated more than $235 million to help construct the park over a huge underground parking garage on the site of what was once an exposed rail yard, adjacent to Grant Park.

Since it opened two years back, the park has proven a popular draw for residents and tourists, with a futuristic, stainless steel band shell, a quirky, water-spouting, changeable mural and a $23 million sculpture, nicknamed the bean.

The idea "was to advertise Chicago as a global center, not only in terms of business, but in terms of art," says Gilfoyle, as he leads a visitor around the park. "In its decentralized, fragmented way, it has worked out."

Part of the success of the park is financial. The city underwrote the cost of the 9,000-car garage construction with a bond issue. Now Chicago is in the process of privatizing the garage. Prospective bidders are conducting due diligence. Bids are due in mid-September.

This follows the city's successful $1.83 billion privatization in 2004 of an elevated highway. Midway Airport is also likely to be privatized, the first major U.S. airport of size to do so. "Chicago is probably in the strongest financial position of any major American city," says Schmidt, who counseled the city on its privatization scheme.

When he travels to Manhattan for pitch meetings, TeamWorks' Sharman almost inevitably encounters a kind of New York snobbery about the Midwest. Sharman says he tries to turn that cynicism around and use his company's Chicago roots to advantage. "One of the reasons we've stayed here," Sharman says enthusiastically, "is Chicago's still one of the best-kept secrets around." Not that Chicagoans are keeping quiet about it.


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