City giants vie to build in Germany

If London is the gateway to Europe, then Germany is its high street and the big international firms are eyeing up the property.

Until recently, the legal worlds of Germany and the UK have remained comparatively separate in spite of growing internationalisation in business. Mutual suspicion and caution, however, are beginning to evaporate in the heat of global business and links are being forged.

Clifford Chance is expected to merge with Punder Volhard Weber & Axster after a vote this September to form a three-way combination with Rogers & Wells in the US. Freshfields will merge with Deringer Tessin Herrmann & Sedemund early next year to form Freshfields Deringer, while Linklaters aims to merge with its alliance partner Oppenhoff & Radler between 2001 and 2003.

The advantage of merging for the international firms is that Germany has one of the strongest economies in the world. It has the largest market in Europe and it is a booming area for legal business. International firms need the major clients at the hub of Europe if they are to be truly global, and they also need bases close to Frankfurt as its financial influence grows.

Alan Peck, chief executive of Freshfields, says: "Germany is the powerhouse of Europe. UK and US firms regard it as absolutely critical. For that reason, I think we will see a whole series of mergers."

Punders' attempt at venturing into the international league started when it set up the Punder Group with five smaller German law firms. Peter Nagele, co-managing at Punders, says the other firms were working to a longer timescale than impatient Punders, which dissolved the group last year and went solo.

Nagele says several UK firms sent delegations to Punders in the hope of setting up a merger. They were below the Magic Circle rank and Punders was not interested. It had been talking to Clifford Chance for months about the European market in general, and a suggestion to start merger talks was made mutually, says Nagele. "The size of Clifford Chance was definitely in its favour. This will leapfrog us in several areas."

He did not fear that Punders would disappear under the Clifford Chance monolith. "We have never seen this as a takeover," says Nagele. "We are convinced that the firms will provide just as good a service whether in London or Frankfurt, but that will only happen when people in the regions who know the local rules and market are the ones who have the responsibility and authority to take decisions."

Others suggest Punders was eager to merge because its income is waning, despite the booming German law market. Some critics raise question marks over the quality of Punders' service in some areas, and pointed out that several partners had left in recent months.

"Punders merged because they had to - to ensure survival in the long-term," said one insider.

Punders was not Clifford Chance's first choice. In its frantic search for a German merger, it had approached the country's largest firm Bruckhaus Westrick Heller Lober and another major player, Boesebeck Droste. Both firms declined. Bruckhaus is considering an international link up as one option, while Boesebecks is reported to be in merger talks with Lovell White Durrant.

But many see the Clifford Chance-Punders link not as a merger but as a straightforward takeover. Clifford Chance has 2,050 lawyers, Punders has 185 and is Germany's fourth largest firm in terms of number of lawyers.

Punders is closing six out of its seven international offices, leaving its Beijing base intact, while Clifford Chance absorbs the others in New York, Hong Kong, Brussels, Warsaw, Moscow and Budapest. Jobs are bound to be lost.

Punders' will boost Clifford Chance in several business areas at the centre of Europe. The firm provides a full service for corporate business, banks and for the market of middle-sized German companies, the "Mittelstand", which is the bread and butter for the large firms. Punders' strengths lie in M&A, banking, capital markets and finance, tax and commercial law. Clients include Deutsche Bank, Coca Cola, Merrill Lynch and UBS.

But observers believe Clifford Chance was desperate to merge - even with a firm where trouble could be brewing - because other tactics by Clifford Chance and the rest of the Magic Circle to get a grip within Germany had failed.

The trouble is that German law firms and most of their clients have been happy with the status quo and do not particularly welcome outside interference. Firms want to consolidate after a merger frenzy in the early 90s, and most German clients are medium-sized companies which prefer the personal touch of their home-grown law firms.

They have traditionally concentrated on the domestic market because they had to. It was only nine years ago that the German Supreme Court allowed them to merge with firms in another city - the legal "Big Bang". It is only recently that the larger firms have started thinking larger-scale.

"This is the main reason for the delay," says Nagele. "It takes quite some time getting used to going from being a small firm to a large firm, and then quite a leap to merging with foreigners."

German law firms do things differently. This can cause tension in alliances where partners on both sides work in an uneasy limbo before a final decision for merger which often dictates whose working practice will predominate.

Anselm Raddatz, a partner at Bruckhaus, says there is a different attitude from German partners compared to UK partners because German firms have been smaller in size.

"A particular client is the focus of a particular partner," he says. "The relationship is still quite personal. You could not say to a client that their partner cannot speak to them and pass them on to someone else. That doesn't work here.

"In UK firms, it is often the heads of departments who will find the new business and trickle it down to partners. Our partners build up their own client business."

Faced with such differences, it is not surprising the international firms have had a troubled history in Germany. Going it alone means having to recruit German partners, who are legendary in their reluctance to leave German firms. "We don't want to leave a prestigious post in one of our country's top firms to join a 15-partner branch office of one of the Anglo-Saxon firms," says one.

Alan Peck says his firm had no choice but to enter into an alliance. "We tried to grow organically within Germany but it just didn't work," he says. "It was very difficult to recruit and it was very frustrating."

The minefield lining the road between London and Frankfurt has also had an unpleasant habit of exploding in firms' faces when alliances have been tried.

Clifford Chance has been eager to make a breakthrough in Germany for more than a decade. It opened its first Frankfurt office in 1989 by forming an alliance with Gleiss Lutz Hootz Hirsch and Partners.

But major differences, including failure to agree on a name, led to the alliance's collapse four years later. Clifford Chance struck lucky in 1996 when it poached 11 lawyers, including three partners, from the fifth-largest firm Wessing & Berenberg-Gossler.

Peck says alliances do not work because they are a halfway house in which common economic interests are not defined clearly. "Our alliance with Oppenhoff was more of a shadow merger because we agreed merger terms when we negotiated setting up the alliance," he says. The two firms will turn alliance into full merger by next May.

The other major UK players have mixed fortunes in their efforts to settle in Germany. Tension is rumoured to surround the current alliance between Linklaters and Oppenhoff & Radler although they aim to merge within four years. Allen & Overy has no German partner but has expanded its own Frankfurt office from two to nine partners in a year.

Slaughter and May closed its Frankfurt office in 1995 and has been sharing teams of lawyers with Hengeler Meuller Weitzel Wirtz. The set-up is similar to the way merged firms work, but the two firms prefer to call it an integrated team approach rather than an alliance or merger. The only Anglo-Saxons considered to have become serious competition to the German firms are at US firm Shearman & Sterling.

Anselm Raddatz reveals that his firm is considering the option of an international link-up but says nothing will be decided in the immediate future.

He is in no doubt that the Clifford Chance-Punders link presents a serious challenge. ''We are taking this very seriously, and it will be followed up with a huge marketing drive from Punders and Clifford Chance," says Raddatz.

In stark contrast. Gaedertz, Germany's third largest firm which has recently finished a domestic four-firm merger, is distinctly unconcerned. Mark Hilgard, a partner who supervised the merger, believes a merger of a German firm with an international giant may alienate German clients.

He is calm about the prospect of the international firms setting up shop in Germany. "We are not afraid of them and can compete with companies such as Clifford Chance here," he says confidently. The Mittelstand did not necessarily want the international "one-stop shops" being created, but wanted the expertise.

"The point about mergers is what will you get out of it and whether it makes sense. Clifford Chance is buying size, and Punders is looking for the big client and the big bill. The Mittelstand are afraid of this because they are used to dealing with smaller firms and want to be treated as the major client of a firm and not feel they are a minor client of a large firm."

Gaedertz would be open-minded to any approach from an Anglo-Saxon firm, Hilgard says, but is currently focusing on consolidating its recent mergers.

"I think we will see more mergers which will be followed very quietly by de-mergers. I am not sure whether these mergers really make sense or are just fashionable," says Hilgard.

Germany has so far been the toughest area in Europe for international firms to colonise, and the next few years will reveal whether the Germans and Anglo-Saxons will have a happy marriage or split up due to irreconcilable differences.