Times of economic depression test the market and precipitate emerging trends. With this in mind, now is a good time to take a look at the European market. While the deal flow may not be as robust as it was this time last year, the consolidation process among law firms is still underway and there continues to be plenty of activity in recruitment.
In Germany firms are feeling the strain, and a few months ago the general perception was that US firms relying on M&A work and which were suffering as a result may have to pull out. However, now that there are signs of an upside, the consensus has changed and the opinion is that they are in for the duration. The recent decision by Dewey Ballantine to open in Frankfurt confirms the trend and is perhaps the first in a new wave of US interest.
The problems being experienced inside Wessing as a result of the merger talks with Taylor Joynson Garrett typify general areas of contention. Already a group of labour law partners in Wessing’s Frankfurt office are threatening to leave following a successful merger agreement; and there is likely to be further fallouts following the merger if previous examples are anything to go by. Take, for instance, the departure of the nine partners from Gaedertz’s Cologne office following its merger with Norton Rose, whose domestic practices did not fit with the international focus targeted by the UK firm.
Some lawyers may disagree, but all the evidence points to a polarisation between domestic and international practices in Germany. Already there is an expectation that there will be some movement of lawyers at firms such as Gleiss Lutz, Nörr Stiefenhofer Lutz and Haarmann Hemmelrath, all of which have so far resisted an international merger.
The downturn has also seen Freshfields Bruckhaus Deringer and Hengeler Mueller consolidate their positions. Firms such as Clifford Chance, Gleiss, Linklaters Oppenhoff & Rädler and Shearman & Sterling would all, no doubt, have liked to have deepened their inroads into the Hengeler/Freshfields client base. But the reduction in deals has meant that there have been fewer conflicts; therefore, both firms have managed to hold on to more of their clients.
It is also worth noting that the tax reforms, which came in at the beginning of the year, have not provided the expected impetus to German industry to shake out its cross-holdings. According to JuVe editor Aled Griffiths, the reluctance is twofold. First, the pricing is wrong given the current economic climate. However, he also believes that their initial willingness was overestimated.
The French market is very different and the current deal flow stems mainly from the refinancing of leveraged buyouts. There is a trend towards the increased use of mezzanine and high-yield debt, whereas plain vanilla M&A is dead. However, the Anglo-Saxon legal market in France is more mature than in Germany and, as a result, there is less insecurity among the international players and a stronger consensus that there is room for more. But at the same time there is a stronger culture among the domestic firms to resist merger with the result that French, UK and US firms have carved out niches for themselves in the market.
Spain and Italy are both lagging behind Germany. Madrid is seeing continual entry attempts by UK and US firms, but up until now the legal market has been too small to accommodate them. Despite a recent flurry of activity in Barcelona, the perception is that Madrid and Lisbon are more important. The laws for foreign companies establishing headquarters in Barcelona are extensive and it is generally agreed that it is better to be in Madrid.
The biggest issue in Italy at the moment is that UK firms are having to face up to the fact that Italian partners earn huge amounts of money and that integrating high-profile partners into UK lockstep is proving to be more of a problem than was initially anticipated. The problem is unlikely to go away and more difficulties are predicted before a solution is found.
With Europe top of the agenda for most UK firms, it seems they have finally got their priorities right. The question is: is it too little, too late? A number of firms – including Allen & Overy, Clifford Chance, CMS Cameron McKenna, DLA, Freshfields and Lovells – have prioritised Europe for some time and it will be hard for others to catch up.