Spanish firm Garrigues pulled the plug on its young Romanian office recently. James Swift finds out why, and if this is a sign of things to come
Law firms hate admitting defeat. By nature, lawyers are thorough and risk-averse, meaning the wheels of change are slow to turn. But once a plan has been set in motion it is difficult for a firm to change course, and reversing a decision is not done lightly.
So it came as something of a shock when Garrigues announced in November 2010 that it would shut its Romania office just two years after launching in the country.
“I wasn’t completely surprised to hear Garrigues would leave the market but I didn’t think that it would happen so fast,” says Stefan Damian, deputy managing partner at Tuca Zbârcea & Asociatii. “International firms are usually quite stubborn.”
Garrigues said it would maintain its Central and Eastern Europe (CEE) practice out of Poland, and that the decision was part of a wider strategy for the region.
“These decisions are part of our current strategy in the CEE whereby the firm will centralise all its functions and services through its Warsaw office as an efficient gateway to all our clients’ needs in this region,” said Alejandro Miquel, head of Garrigues’ CEE operations.
Mihai Mares, managing partner of Garrigues’ Bucharest office, will join Romanian independent firm Musat & Asociatii as a managing associate, along with around half of the nine-lawyer team that was at Garrigues.
There can be no doubt that Romania presents challenges for international firms. Political turmoil has almost become the status quo, the economy is one of only two or three in Europe not to rebound in 2010 and domestic firms have a strong position in the market. For more on the latter point, see The Lawyer’s last special report on Romania (4 January 2010).
So will Garrigues’ decision prove to be an isolated incident or is the state of the market forcing international firms to reconsider their position? At least one Romanian lawyer seems to think so.
“The view is formulating that other internationals are thinking of leaving as well,” says one partner at a Romanian firm. “Other firms such as White & Case, DLA Piper and CMS Cameron McKenna have seen either significant management changes or musings – on a global level – about where they should be. Others have continued their reductions in force. Internationals are having a hard time, these days.”
Others, not least the firms themselves, strenuously deny that international firms are facing struggles above and beyond those faced by local firms.
“I doubt foreign law firms are doing that badly that they need to shut down: we are far from that point,” says Catalin Baiculescu, co-managing partner of Musat & Asociatii. “Everyone has their own clients. Certainly the market is not what it was, but it’s not that bad either.”
There is a case for arguing that Garrigues was unique, and pursued quite a different strategy to its competitors.
“I think Garrigues was a special case,” says Christopher Berlew, managing partner of Salans’ Bucharest office. “I wouldn’t infer anything from it about the market. Since Linklaters pulled out two years ago I haven’t heard any rumours about any more firms and, this being a rumour-intensive market, I’m sure I’d have heard something.”
Love don’t live here anymore
Garrigues launched its Bucharest office through a merger with local firm Mares & Asociatii. The firm entered the market on the back of the boom in real estate, which had already begun to dry up when the office opened in July 2008. As early as January 2009 market commentators had their doubts, with one partner saying Garrigues was “suffering the consequences of a gamble that hasn’t paid off”. The real estate market in Romania has still not rebounded; business for the firm must have looked bleak.
The response to the crisis from most international firms in Romania seems to have been to cast their net as wide as possible and to move into previously ignored practice areas.
“Most of the international firms here were attracted to the market because of the boom years spurred by the real estate market,” says Gabriel Sidere, managing partner of CMS Cameron McKenna’s Bucharest office. “When you’ve put all your eggs in one basket, it’s not easy.”
“We always were full-service. In the boom time our commercial litigation practice accounted for a third of the office and our real estate practice was only around 10 per cent. Of course, everybody is diversifying now – the difference is that now they are forced to do that.”
Rain in Spain…
For Garrigues, which focused only on Spanish clients and had only been in the market a short time – certainly not long enough to build up a strong brand – it is possible that diversification was not really an option. However, there is mixed opinion in the legal market as to whether there was enough work to sustain a practice in Bucharest, given that Garrigues had little or no competition in its niche.
“The firm had probably been negatively impacted by the crisis in Spain too,” says one partner at an international firm. “Of course, there isn’t the level of work for a Spanish firm that there is for an Austrian or UK firm, but if there’s only one firm doing it there should be a reasonable amount of business.”
At almost the same time Garrigues announced that it would withdraw from the market, local firm Pop Pepa absorbed the Bucharest office of Spanish firm Martínez-Echevarría to create a Spanish desk at the firm.
“It’s a great moment to get into partnerships and open up new business strategies,” says Claudiu Anton Pop, managing partner of Pop Pepa. “Our clients are primarily international in scope, so we know what is expected. Spanish companies are increasingly becoming key players throughout Eastern Europe. We will service an increasing Spanish interest in Romania, especially in the areas of energy, infrastructure, M&A and financial services.”
Others tough it out
While this move could be interpreted as showing that there are enough Spanish clients to sustain a business in Romania and make it attractive to other firms, it could also support the contention that narrowly focused firms struggled most, and could not survive without the buffer of full service.
It would seem the UK, US and Austrian firms in Bucharest are content to tough out the downturn. Even DLA Piper, which only entered the market in October 2008, is reported to be coping quite well, with a healthy list of clients.
But it is worth remembering that the country has still not hit rock bottom – a disconcerting thought when you consider how far deal value has dropped already – from over $1bn (£630m) in 2000 to less than $100m in 2010, according to Thomson Reuters. The economic climate has also led to significant pressure on fees for international firms, with one partner saying that among clients in Romania “minimal budget prevails over demand for quality”.
The Romanian challenge
“I don’t expect anyone to pull out this year,” says Marian Dinu, DLA Piper’s Bucharest office managing partner. “Maybe next year people will make calculations to see if it’s worth staying.”
“It’s pretty hard to say whether Garrigues’ departure indicates a trend,” adds Daniel Torsher, managing partner of Kinstellar’s Bucharest office. “Romania’s a pretty challenging market for anyone who isn’t fully prepared, and I think firms where local practices are held to global standards of profitability see it as particularly difficult.”