Czechs and balances

The Czech Republic has long been home to one of the most competitive legal markets in Europe. International firms piled in post-Iron Curtain and have come to dominate the scene. But a number of recent moves are causing lawyers to question whether there is still room for everyone in such a crowded market.

In November 2010 Gide Loyrette Nouel closed its Prague office as it recentred its Eastern Europe operations in Romania and Hungary. The 10-strong team was picked up by local firm PRK Partners, which seized the opportunity to boost its relationships with French clients.

This year, to date there have been two large teams shifting their allegiances. DLA Piper announced that it was hiring two of Wolf Theiss’s three Prague partners plus a team of associates in a significant growth move for its Czech operations; and that news was followed swiftly by White & Case’s announcement that it had taken on the bulk of domestic litigation boutique Horák & Chvosta. The US firm is already one of the biggest firms present in Prague.

White & Case Eastern Europe managing partner Jan Matejcek says the Czech office was lacking litigation and arbitration expertise. According to Matejcek, White & Case had previously instructed Horák & Chvosta co-founder Ludek Chvosta as a special counsel on disputes. Bringing Chvosta and his team on board therefore filled a gap.

DLA Piper’s reasons for hiring Wolf Theiss partners Pavel Marc and Jakub Adam were different. Until their arrival the firm had just one partner in the country in Peter Valert.

“We just thought we needed to raise our profile and be better positioned to take the opportunities that we still believe are in the Czech market,” Valert explains.

He adds that, although DLA Piper had been advising on a range of work, its focus had naturally fallen on his own area of ­practice, IP and IT.

“This move for us has of course boosted our corporate and our banking and finance capabilities. We feel that the addition of these partners and their team will give us the right platform to give us critical mass,” says Valert.

Home front

While the most recent moves have involved international firms taking on teams from local or other international firms, PRK ­managing partner Martin Kríž thinks his firm’s opportunistic snatch of the Gide team is a sign that things are changing.

“Local firms are actually growing and becoming strong, taking back the ground from the international firms,” asserts Kríž. “Combined with the fact that the era of ­privatisation is over, it’s much more difficult to create magic circle work in the Eastern European market. Magic circle deals are the exception rather than the rule.”

Nobody in Prague would be surprised to see more firms pull out of the market.

“You never know when one of the other ­international players will pull out,” remarks Lukáš Ševcík, managing partner at ­Kinstellar’s Czech office. “It’s just a result of the highly competitive market here. There are always some long-term rumours about most of the firms having plans.”

Quite which firm might be next to ­consider its Prague presence is debatable. During research for this feature practically every international firm in town was named by competitors as “weak” in one area or another. This is an indication of the ­combative nature of doing business in the Czech Republic.

Energy reserves

However, in the immediate future most firms seem content to stay put. Last year’s work was dominated by the rush into the photovoltaic energy sector. Government incentives to encourage investment in renewable energy ended at the end of 2010.

CMS Cameron McKenna Prague ­managing partner Iveta Placha thinks the end of these incentives marked the end of the energy boom for the jurisdiction, at least when it comes to transactional work. But Camerons is now working on ­litigation related to the solar projects. As the ­government changed the law when it ended the incentives, the firm thinks there is scope for action against the state.

“None of the investors are happy and we’re grouping them to challenge the ­decision of the government,” Placha reveals.

Any litigation or arbitration would take place outside the Czech Republic under international arbitration treaties. But other firms report plenty of litigation work inside the country.

The year of truth

Weil Gotshal & Manges Czech Republic managing partner Karel Musikar reports being “very busy” with litigation on behalf of the Czech state, notably the Ministry of Transport and the Ministry of Finance. Musikar says Weil also has plenty of ­regulatory and competition work on the go.

Transactional activity is more varied. At Austrian firm Schoenherr Prague managing partner Martin Kubánek reports a “slight increase” in revenue last year.

“We hope that this year will be better, but I’m not sure - it could be worse,” concedes Kubánek. “For some law firms this year will be the year of truth.”

Kinstellar’s Ševcík reports a pick-up in general M&A activity towards the end of 2010, in line with activity in several other European jurisdictions.

“I have to say we’ve seen increased ­activity across the office,” he notes. “Surprisingly enough, that kicked in when I expected the market to go into summer holidays. The beginning of last year wasn’t so good, but then it really picked up and started to move forward at the end of the year. It carried on nicely in January and February and now into March it looks strong as well.”

A deal picked out by Ševcík is the ­proposed acquisition of bathroom accessory company Novaservis by Polish competitor Ferro. The CZK1.17bn (£42m) takeover might be small in global terms, but it is a good example of the sort of inter-regional cross-border M&A that is going on at the moment.

The return of private equity

A large part of this is driven by private ­equity investment.

“We’re seeing a resurgence of private equity activity in the market,” reports Matejcek.

His colleague, corporate partner Michal Smrek, says many of the deals are driven by privately owned companies with ageing ­management teams looking for succession plans. Smrek identifies three types of ­private ­equity investor: international funds ­dedicated to investment in CEE; larger, ­generalist funds making single investments in the Czech Republic; and local investors.

“Most of the activity’s in the low [to] mid-market,” adds Matejcek, pointing out that there are hundreds of small Czech ­companies with turnovers of less than $30m (£18.6m) that are ripe for investment or takeover.

IT and telecoms are popular areas for investment, with recent deals including a $100m injection by Summit Partners into antivirus software company Avast.

Ševcík agrees that private equity work is on the rise.

“We’ve done smallish deals but also larger ones, with both the buyout and private equity funds exiting and strategically buying,” he says. “There’s much more activity and the purchasers and the sellers seem to have found common ground on the pricing.

“If I were forced to say that there was a trend in something, I’d say that it’s this increased private equity work.”

Another area of growth, which was not expected by many, is real estate. Erwin Hanslik, managing partner at the Prague office of Austria’s ENWC, points to work for an Austrian-managed Luxembourg real estate fund as an example.

“Investors are coming to the Czech Republic again, investing in and purchasing real estate,” insists Hanslik.

Salans global real estate head Evan Lazar backs up Hanslik’s observation.

“Since the second half of last year we’ve seen substantial recovery in private equity and real estate investment funds,” he says. “We’ve seen much more in Poland, but the Czech Republic’s following.”
Real estate work appears to be a mixture of transactions and increasingly new ­developments in both residential and ­commercial properties.
“People are turning to development again,” says Camerons’ Placha. “It’s like in the 1990s when everybody was developing. We have some clients who stopped ­developing five years ago and now they’re starting to do residential projects.”

Outside influence

Once again the work is dominated by cross-border and international clients. This ought to be good news for most international firms in Prague, as the majority admit that their Czech client lists are thin at best.

Even local firms are reliant on ­international clients. PRK’s Kríž says this was one reason for taking on Gide’s Prague team.

“We were always serving French clients, but this has obviously been a good boost for the French practice,” he notes. “The French are everywhere and they don’t tend to use Anglo-Saxon firms.”

Austria-headquartered firms in ­particular spend most of their time advising German-speaking companies. Schoenherr’s Kubánek estimates that just 20 per cent of the Prague revenue comes from domestic clients.

“We’d like to boost this [locally sourced] portion of Czech work,” he says, revealing that this is the firm’s goal for the next few years. “It’s not easy for pure Czech clients to accept a law firm with such a German-speaking brand. It’s about personal ­connections.”

But Musikar is scornful of any division between international and domestic firms. He believes that with hard work and the right strategy it is possible for any firm to develop a strong local client list.

Musikar says his policy in his tenure in Prague began by targeting state-owned ­companies. As a result, he says, the firm has kept instructions from the private ­corporations that now own these businesses.

“I feel this is a great Czech law firm with an international headquarters,” Musikar says. “Weil means nothing, it’s just about how good the lawyers are in town.”

Fee radicals

No matter how good the lawyers are, everyone says fees have come down significantly in the Czech Republic in the past few years. Some lawyers estimate that this drop has been as much as 50 per cent, due in large part to clients insisting on fixed fees.

“Many clients who never thought about it before are looking for fixed prices,” ­confirms Placha. “We’ve never been used to the fact that the legal services market is really ­commoditised. The clients aren’t just ­looking for a good lawyer - they’re looking for a smart law firm, a very reasonable price and something extra. That’s pretty new in this market.”

Law firms will have to continue to find ways to stand out. Further moves between firms are likely - Wolf Theiss, for example, has already indicated its intention to replace the partners who left for DLA Piper. Firms will also try to diversify, like White & Case, into new practice areas to take advantage of changing opportunities in the Czech market and the surrounding region.

Whatever happens in terms of workflow, the Czech Republic will remain a fast-­moving place for law firms.