Central Europe Special Report: Close courters
1 December 2008
As international firms turn their attention to Asia and the Middle East, their Viennese counterparts have increased their efforts in Central and Eastern Europe. By Chris Crowe
Under the heavy gloom of the global financial crisis, the Austrian legal elite have stayed resolute. Despite the economic malaise, Austria’s legal market remains intent on furthering its business in its natural dominion, Central and Eastern Europe (CEE).
Just as international law firms have turned to perhaps more colourful markets such as China, India and the Middle East, their Austrian counterparts have grasped the opportunity to move ahead in CEE.
The circumstances were summed up perfectly this year when Linklaters elected to pull out of four CEE jurisdictions. Additional magic circle rivals may be considering doing the same, according to persistent rumours in the Austrian legal market.
Austrian firms remain committed to the CEE region. Even with Hungary receiving aid from the International Monetary Fund (IMF) in October, this has not dampened Austrian firms’ fervour for CEE. This zeal is far from unfounded. The IMF still predicted earlier this that annual growth in CEE would be far in excess of that of the Eurozone and the US. EU expansion has also helped to fire up CEE economies such as Bulgaria’s and Romania’s.
“I don’t think these markets are of larger concern than any other markets in the world,” contends Ivo Deskovic, head of DLA Piper’s CEE business.
Deskovic says that even troubled Hungary has been “stabilised” and is “back on track”.
Austria has a longstanding nexus to the CEE region, but lately the country’s law firms have begun to see off some powerful players. Unusually the CEE territory has become one of the few areas where UK and US law firms are not becoming increasingly dominant. On the contrary, Austrian law firms’ efforts to exploit the region appear significantly more intense than their UK or US rivals’.
Earlier this year Linklaters announced that it would axe its Bratislava, Budapest, Bucharest and Prague offices in November. These offices have continued under the title Kinstellar and continue to work in association with Linklaters.
Last year Freshfields Bruckhaus Deringer closed its Budapest office, although it retains its Moscow base.
Although rumours of fellow magic circle firms following suit have yet to come to fruition, UK and US law firms – aside from the ubiquitous DLA Piper – have shown nothing like the levels of investment in CEE that they did in the 1990s and during the early part of this decade. Asia – including China and India – and the Middle East have received much more attention.
“I think small CEE jurisdictions are more of a distraction to international firms,” says Peter Hoffmann, CEE partner for Austrian firm Cerha Hempel Spiegelfeld Hlawati (CHSH). “I think a large English law firm’s business model isn’t sustainable in the CEE region because they’re focused on the high end of the market. There are a lot fewer transactions of this kind in CEE than in
the UK and US. I think some firms had unrealistic expectations.”
A retreat such as Linklaters’ withdrawal provides opportunities for Austrian ambition.
“I think [international firms withdrawing from the market] has further improved our ability to develop business in the region with relatively few quality firms operating in specific markets,” says Christoph Lindinger, managing partner at Vienna-based Schönherr.
DLA Piper, which has its CEE HQ in Vienna, recently announced that it would open a Bucharest office after hiring senior associate Marian Dinu from Linklaters’ soon to be defunct Romania branch. DLA Piper merged with Austrian giant Weiss-Tessbach back in 2005 to commence its concerted emphasis on the CEE region.
It and other firms headquartered in Vienna have not been dissuaded from heightening their focus on CEE, despite others seemingly losing interest as they become distracted by Asia and the Middle East.
“Maybe our model’s different [to other international firms’],” muses Deskovic at DLA Piper. “In CEE we have the broadest reach of international law firms’. We have a good presence in all the key markets and can handle both global or regional business.”
Lindinger at Schönherr is adamant that his firm will remain committed to the CEE region, even if the markets become further depressed. “If you look at the Austrian market, it’s fairly small,” he says. “Where there’s room for expansion, it could be India or China, they’re not very close options. CEE is our China.”
Schönherr launched an office in Hungary earlier this year after creating an association with 21-lawyer firm Szécsényi Ügyvédi Iroda to form Schoenherr Szécsényi Ügyvédi Iroda. Szécsényi was previously allied to Vienna’s CHSH.
Although these firms have been intent on spreading their resources, not all Austrian firms are committed to actual physical expansion.
Martin Brodey, a partner at Austrian firm Dorda Brugger Jordis Rechtsanwälte, says that a network of best friends in CEE has suited the firm’s ambitions. The network now covers 10 jurisdictions and Dorda is considering moving this further east to Ukraine and even Turkey.
“We started this process six years ago,” Brodey relates. “We wanted immediate access to lawyers of good quality and who were properly connected to the marketplace. We basically chose one firm out of the top three to five in each jurisdiction.”
Last year Dorda advised Bayerische Landesbank on its €1.62bn (£1.37bn) acquisition of a majority stake in Hypo Alpe-Adria-Bank International, the Austrian parent company of a financial group focused on banking and leasing services in South Eastern Europe. The firm’s best friends handled elements of the due diligence process and Brodey contends that this worked even better than Dorda having its own offices in the respective jurisdictions.
Austrian companies continue to be major investors in CEE. Austrian investors represent the one of the largest, if not the largest, sources of foreign capital flowing into the region.
“Austrian investors are very strong in the region,” comments Lindinger. “They’re among the number one to number three foreign investors in each jurisdiction, aside from Russia and Poland.”
This provides Austria’s legal market with a natural CEE emphasis. Schönherr recently advised Austrian insurance group Uniqa Group on a series of acquisitions throughout the region, including in Bosnia, Bulgaria, the Czech Republic, Poland, Romania, Ukraine, Serbia, Slovakia and Slovenia. It also represented Uniqa on the purchase of a majority stake in insurance group Sigal, with the deal covering the jurisdictions of Albania, Kosovo and Macedonia.
Austrian companies are far from timid when it comes to making foreign acquisitions. CMS Reich-Rohrwig Hainz recently advised the Vienna Stock Exchange on its takeover of the Ljubljana Stock Exchange, for example. “These deals were clearly attributable to us having a presence in [Slovenia’s capital] Ljubljana,” says Peter Huber, a partner at Reich-Rohrwig.
Broad territorial coverage has certainly favoured Austrian firms. Many have demonstrated increasing bravery when tackling new jurisdictions. Using Vienna as a hub for the region is clearly regarded as insufficient.
“South Eastern Europe is part of our home market and we feel at home there,” says Huber. “The market fragmentation is not easy to deal with, but Austrian firms are very good at adapting to these circumstances and the structure of these markets.
“I think that’s the reason why we have a competitive advantage.”
Austrian firms have demonstrated a forthright ambition to tap into more undeveloped markets, while the majority of UK and US firms remain cemented in more mature states, such as Poland, the Czech Republic and Hungary.
Leading Vienna firm Wolf Theiss opened an office in Bulgaria in June 2008 by hiring Bulgaria Telecommunications Company general counsel Richard Clegg. The firm joined fellow Vienna rival CHSH, which also opened a Sofia office in February. Other foreign firms in the city include CMS Cameron McKenna, DLA Piper Weiss-Tessbach and Schönherr.
The increasing GDP growth, sophistication and maturity of South Eastern European markets has initiated another source of inter-regional transactions. It has provided further encouragement for Austrian firms to spread their tentacles. In May CHSH opened a second office in Romania, in the city of Timisoara.
In Serbia Reich-Rohrwig, Schönherr and Wolf Theiss all now have offices. DLA Piper Weiss-Tessbach, Reich-Rohrwig and Wolf Theiss are now also in Bosnia-Herzegovina. Austrian firms have embraced new emerging markets as well as more mature economies and these bold moves have been rewarded by the mounting flow of capital between CEE jurisdictions.
Deskovic at DLA Piper suggests that his own firm’s recent investments in the region is just as much about handling pure CEE business as servicing international investors.
“We opened in Warsaw 18 months ago and we’re now working for Polish companies in Ukraine,” he says. “We’re now also representing Russian companies in a number of countries, including Austria and the Croatian coast. So you can see these cross-border investments within the region.
“I think something’s happening in contrast to 15 years ago, when it was just an inward investment area with transactions coming from Western Europe and the US. But largely what we’re seeing is cross-border investments within the region, because the region’s developed and stabilised.”
Hoffmann at CHSH suggests that, for this very reason, regional coverage is an absolute necessity. “The markets are increasingly integrated and clients want a fully integrated service because they tend to be in more than one country,” he says. “We don’t see any particular country as an isolated market anymore – business is done regionally. In the long term we’re hoping to create a fully integrated CEE law firm.”
Clearly, many of CHSH’s Vienna-based rivals have the same plan and are not paralysed by economic anxiety.
Schönherr, for instance, is planning to open an office in Bratislava in February 2009. “We’ve waited long enough to go into the Slovak Republic and it doesn’t make sense to wait another five years,” insists Lindinger. “In times of a crisis there’s no sense in sitting here as a nightmare junky. We’re not distracted by bad news, and our strength is that we’ve never been a very pronounced capital markets firm.
“This business is dead for the time being and we don’t care.”