19 July 2010 | By James Swift
The past two decades have seen enormous transformations within the German legal system, not least with the ever-changing appetite for mergers. James Swift examines a market on the verge of its latest mutation
Big changes in the German legal market tend to come in waves. The reunification of East and West Germany brought with it mergers between national firms, which, in turn, created the big beasts that became attractive targets for the large US and UK firms in the late 1990s.
The next trend saw spin-offs from these merged firms, instigated by partners who could not get on board with global firm-style management and favoured independence.
“Since 1999, German law firm culture has been transformed,” says Ami de Chapeaurouge, name partner at de Chapeaurouge & Partner Rechtsanwälte. “Most independent firms either went with UK firms, such as Gaeddertz in Frankfurt - the former Albert Flad Schlosshan, a few with US firms, such as Mayer Brown, or joined accounting firms, the latter alliances having been dissolved pretty quickly. But since then, we’ve had a surge of independent firms. We now have a group of 50 firms of a size anywhere between 40 and 250 lawyers.”
And now it appears as though the German legal market could be on the crest of a new wave of consolidation. As the downturn and slow recovery faced by Germany forces large international and independent firms to fight over mid-market transactions in lieu of big-ticket deals, and US and UK firms that did not enter into Germany in the last wave begin looking at merger targets, mid-sized independent firms in Germany face a crossroads in terms of strategy.
“There’s a development tending towards a more open market and there may be more discussions as to whether a third wave of mergers will come,” says Noerr co-managing partner Tobias Bürgers. “The first wave was top-tier German firms merging, then, over the past three or four years there’s been a tendency towards mid-sized international firms to set up global practices, and Germany is an attractive market. And these international firms are now going after Germany’s mid-sized firms.”
Bingham McCutchen is the most recent example, opening an office in Frankfurt in July 2010 after poaching Jan Bayer, a partner at local independent Broich Bezzenberger.
But mergers are not the only issue facing Germany’s independent firms. At the beginning of this month, less than nine months after the firm’s managing partner elections - which saw Christof Kleinmann and Robert Theissen elected to replace Carsten Bitner and Barbara Mayer with a majority of 80 per cent, according to Theissen - German independent Graf Von Westphalen split in two, with partners from each camp citing strategic differences as the reason behind the break.
The departing contingent consisted of 50 lawyers (including 25 partners) from the firm’s Cologne and Freiburg offices - more than a third of Graf von Westphalen’s total 132 fee-earners. Among the dissenters’ ranks was even name partner Friedrich Graf von Westphalen. The two offices will launch as independent firms at the beginning of 2011.
A statement released by Graf Von Westphalen said the split was down to “differing ideas about the strategic orientation of the firm”. In the simplest terms, the issue was whether or not the firm, which caters to mid-size clients, should adopt an internal structure resembling that of international firms such as Linklaters or Freshfields Bruckhaus Deringer, and go after big deals.
On the one hand, the Cologne and Freiburg partners, content with mid-market transactions, wanted to retain a more entrepreneurial approach to running the firm, while the rest approved Kleinmann and Theissen’s move towards a more controlled structure, based around the international model.
“I think that not only in Germany but across the world we have a split between the approach of international firms and independent national firms,” says Gerhard Manz, a corporate partner in Graf von Westphalen’s Freiburg office. “You have the Daimler-Chrysler deals on one side, and mid-market deals on the other side. A national firm such as ours isn’t really fit to handle Daimler-type deals, rather we’re more suited to the mid-market, and this leads to a different structure. You can’t be a mid-sized firm and have that same structure as Linklaters’.”
Manz lays down the ethos of the Freiburg and Cologne offices in three points: “an entrepreneurial approach, a focus on mid-market work and a pronounced international focus. What we mean by an entrepreneurial approach,” he explains, “is that we’re partners in the sense that we’re all responsible for the turnover and business development of the firm. We don’t just have two or three guys that do business development; for us every partner is in charge of thinking about international strategy.”
While Manz and Mayer certainly make a case for maintaining an ’entrepreneurial’ approach to running Graf von Westphalen, co-managing partner Theissen defends his strategy of implementing a global-firm structure as the correct course for the firm with reference to Germany’s federal landscape and the legal market in each city where Graf von Westphalen has an office.
“To understand the situation you must look at the cities where we are located,” says Theissen who, after the split, will have offices in Hamburg, Frankfurt, Munich, Dresden and Berlin. “Within 500 metres [of the Frankfurt office] I have all my main competitors around me; so does the Munich office. We have to compete in a different way to the people in the Freiburg office because [in Freiburg] we’re the biggest firm by far. The nearest competitors only have around seven lawyers, so it’s a very different approach. If a company wants to do a large deal [in Freiburg] they almost have to go to our firm.
“So we believe that we have to change with the market. It used to be that we’d approach clients as an individual partner saying, ’I’m the best and I’ll solve your problems’. But now, to go into big business, you have to approach things on an industry sector level. We’re offering integrated services and these services need a backbone to have the internal structure to provide the services with the minimum expenditure of energy.”
But Theissen hastens to add: “That doesn’t mean we have a clock running now. We certainly don’t want to turn into the kind of US firm that requires associates to do a 20-hour day or else their computer doesn’t shut down.”
Frankfurt-based White & Case corporate partner Markus Hauptmann, who was at Feddersen Laule Ewerwahn Scherzberg Finkelnburg Clemm before it merged with White & Case in 2000, believes that a move towards an international structure is a move that chimes with clients’ demands in the market.
“Clients and general counsel are being forced to reduce legal costs,” says Hauptmann. “They won’t just let a law firm work on a transaction without knowing which lawyers are on the deal and then accept a huge bill. They’re much more selective and only pick out what they need.
“Mid-sized companies are very important in Germany and their work originates through personal relationships, so you need to have a network and structure for that within a firm, although there’s still a need for a relationship partner and this needs to be reflected in the credit system of the firm. If it isn’t, then problems can arise because a partner may not share their relationships and will try to do everything for a client by themselves. But because they can’t be experts in all areas they’ll need to bring on more associates, making the whole process more expensive.”
But while Hauptmann espouses the virtues of an international-firm structure as a means of keeping costs low for today’s more frugal clients, he believes it will be a challenge for an independent firm to establish such a structure.
“We were only able to do this inside the network of an international firm,” he says, with regard to the systems that were put in place in his Frankfurt office when it joined White & Case in Germany. “We couldn’t have done it as a German partnership because you need outside help and external peer pressure; someone explaining how it’s done, what’s working and how you can be integrated into a new system.”
Hauptmann also warns that, for international firms that have recently entered the market or are considering opening an office in Germany, it could be an unforgiving time, particularly once the honeymoon phase of a merger or bolt-on has passed.
“As soon as firms get into a regular pattern of business and start facing competition from firms that have been here for more than 100 years, it can get very difficult. Every lawyer who wants to go to Germany at the moment needs to have clear book of business,” he says.
The result could be the emergence of another class of independent firms, spawned from unhappy partners at newly incorporated offices. Perhaps change in the German market comes in cycles, not waves after all.