old herding dog

Question
We just adopted a 12 years old Border Collie / Australian Cattle Dog mix. He is the sweetest dog and quite active for his age. He gets along with our 3year old Blue Heeler and he loves to fetch his ball (and does so without problems). But when we do some 'close contact' playing (razzle or tug war with a rope) he gets extremely excited and his herding instinct comes out - he nips and bites. I usually yell at him, hit him (or grab him by the neck) lightly and stop playing immediately. And while that works with the Heeler the old dog doesn't get it - he wags his tail while I spank him and thinks I'm still playing. Even when I play with the Blue Heeler and not with him he comes running over and tries to 'herd' me. I understand that I cannot break the instinct itself but there must be a way to control it - is there? I love playing with him but I'm tired of bleeding calfs and bruised thighs...

Answer
Hitting any dog for any reason IS OUT OF THE QUESTION.  STOP.

ANY activity that elicits behavior that is unwanted MUST STOP IMMEDIATELY.  There is no reason to play razzle (whatever that is) or tug of war with this dog.  Tug of war games requires that the dog learn to "take it" and "leave it". This dog is "splitting" when you are playing with your Heeler, he is attempting to interfere with an activity he has learned to fear: because he has been unfairly disciplined, he is attempting to control this sort of "play" with your other dog.

At 12, this dog is set in his ways.  You don't know his history and he can't tell you.  Dogs are dumped for all sorts of reasons, none of them legitimate.  Every dog needs calm, consistent structure.  Anxiety and stress is high here and your Heeler is anxious also and may be acquiring a fear response to any activity that causes the new dog to interject itself.  Stop all forms of play that involve physical contact.  You can continue tossing the ball for him but you must KEEP THE BALL and the end of the game.

See the following video for "take it, leave it":
http://www.youtube.com/watch?v=ApIJV8oGphg&feature=related
http://www.dogstardaily.com/videos/tug-war-0
http://www.dogstardaily.com/videos/find-tug-toy-0

Dogs with control issues need structure and need to learn to respect your social status:
http://www.youtube.com/watch?v=r3o4yuC6pXg

Whenever over excitement is an issue, avoiding situations that artificially evoke it are important.  Sometimes these situations can't be avoided, so teaching the dog to respect its boundaries of behavior with you is important.

At so advanced an age, many dogs develop what is called response perseverance: stopping or changing a response becomes quite difficult and in some cases impossible.  Use the videos above to instruct both your dogs, but especially the new addition.  If you have any problems or wish more information, please use followup feature (so I can remember original question and my answer to it).  Adopting an older dog is a wonderful thing to do but remember that with that dog come behaviors created by other people not as kind as you are.  :o/