Focus: German earnin’
19 October 2009
German practices have increased their profitability considerably over the past few years, but are there signs they may have reached a peak?
Freshfields is the largest firm in the German market by lawyers and turnover. The fact that turnover and revenue per lawyer (RPL) went backwards for the first time speaks volumes. The year was going well until Lehman Brothers hit. No amount of advice to the German government on the nationalisation of Hypo Real Estate - certainly the highest-profile event of the year - could make up for a withering M&A market.
Freshfields German managing partner Manfred Finken points to the broader practice as being central for the still-strong performance: employment, litigation and restructuring were all booming, even if some of these teams are seen by competitors as undersized.
One other aspect of the German figures makes interesting reading for the London partners: Freshfields’ German margin is just over 50 per cent. Despite having six offices (including a spanking new building in Cologne), the firm runs a tight ship in Germany.
Hengeler became the second-highest-grossing German practice for the first time, due partly to the collapse of Clifford Chance’s figures last year. Private equity has been a major earner for the firm over the past few years, but 2008 saw few closed deals, even in its earlier months. Those capital markets deals that did close were not, according to Hengeler partners, particularly high-margin.
But work tailed off badly at the end of 2008, leading to gloomy projections for 2009. The dominance of Hengeler in the reorganisation of the banking industry, the return of Shearman & Sterling in M&A and Linklaters’ concentrated attack on Hengeler’s key clients did not lighten the mood.
It is indeed this comparison to key competitors that interests Hengeler partners most. But there is some comfort in the number-crunching: the gap between Hengeler and Freshfields as regards productivity has remained fairly steady. Over the past three years the difference between the firms’ RPLs remains flattering for the German independent firm: Hengeler’s e957,600 (£876,234) this year is some 35 per cent more than Freshfields’. The latter had closed the gap to 25 per cent last year, but recession took an even heavier toll on the UK firm’s numbers. But on the other hand, for the first time since 2004 Shearman has overtaken Hengeler as regards productivity. The US firm now lies an astonishing 25 per cent higher.
This will be a watershed year for Hengeler. Although its partners remain bullish that the deals pipeline is on the way back, its share of the big deals is now under far more pressure from rivals than five years ago.
At first sight Linklaters’ German figures do not look strong. But the reduction in turnover is due primarily to the decision to spin off its large Cologne office and move only a selection of lawyers to Düsseldorf.
The RPL figure is far more significant. A decline of 1.8 per cent is relatively healthy in comparison with rivals’ figures. The Düsseldorf decision went hand-in-hand with a stronger focus on blue-chip work. The first deals for energy giant RWE and Thyssen Krupp demonstrate that the strategic shift is paying off.
But there is still a way to go before Linklaters can be said to be fulfilling its potential in Germany. Considering that the firm has declared that leverage is likely to decrease in response to the demand for partner-orientated work, the firm’s RPL is significantly behind Freshfields’ and Allen & Overy’s (A&O), while firms such as Latham & Watkins and Gleiss Lutz are beginning to close the gap.
The past year was one to forget for Clifford Chance. The 13 per cent fall in turnover hit all the practice areas, with only litigation showing resilience. For the first time Clifford Chance lost its position as the second-highest-grossing firm, while RPL fell below the significant €500,000 mark for the first time since 2005-06.
So is there any good news? Well, Clifford Chance has tried to pack most of the bad news into one year, so there should be a better story come the next. The private equity practice has started to recover (it completed the first major post-Lehman buyout only a few weeks ago), while the corporate team was the driving force in Volkswagen’s takeover of Porsche.
The firm’s restructuring has also freed up equity for a number of younger partners. Indeed, these rising stars are seen as particularly strong in Germany.
But the next few years will be a real challenge: the election of a new German managing partner is on the horizon, plus most of the practice groups will have new leadership in the near future.
There is much to do.
Allen & Overy
Of all the UK firms it is A&O that has progressed the most over the past year. For the first time it has topped e100m (£91.62m) in German revenue, while its local margin is 53 per cent. It is also the first time that this revenue represents more than 10 per cent of the firm’s worldwide turnover. Indeed, the German turnover has grown by more than twice as much as the worldwide average. The biggest change is in corporate. Last year the eyes of the market were on partner Rolf Koerfer’s advice to Schaeffler on its initially hostile takeover of Continental. He left a few weeks ago to rejoin Oppenhoff & Partner.
The finance practice continues to boom, primarily through the restructuring practice led by Peter Hoegen and debt finance through partner Neil Weiand. It all adds up to an RPL that looks good in comparison with its magic circle competitors’: a 16 per cent increase is impressive, while the absolute figure is only e3,000 behind Freshfields’ and way ahead of Linklaters’ and Clifford Chance’s. No wonder that, with the restructurings its competitors have had to endure over the past few years, A&O lawyers are relieved that the German practice never had to go through a merger, with only two partners in Germany affected by the recent worldwide restructuring.
Shearman & Sterling
It now looks almost comical that competitors were writing off Shearman two years ago. After it lost the Mannheim office and a number of senior partners left the Düsseldorf and Munich offices, it looked as if the US firm’s days in Germany were numbered.
But now that the dust has settled it looks as if Shearman is stronger than ever in Germany, while rainmaker extraordinaire Georg Thoma continues to pull in the big deals. The firm’s
RPL rocketed to almost e1.2m (£1.1m), while, the smaller practice is foc-used almost exclusively on major M&A after the broader Mannheim practice spun off.
Acting for Allianz, the sale of Dresdner Bank to Commerzbank was the highlight, and this year’s figures will probably be no worse: the generation under Thoma has come into its own. The firm advised the government on the rescue of Opel and sovereign fund Qatar on its major stake in Volkswagen/Porsche. It has become a cliché in Germany to describe Shearman as Thoma & Partners. Last year showed that this tag is now out of date.
Gleiss’s calendar financial year meant around nine months of good business before the markets tanked. So the firm’s encouraging results - a 15 per cent increase in turnover - have to be seen in that light. The current year will be more challenging since it will have seen more of the recession’s impact.
But seeing as it is Gleiss’s large corporate practice that is driving the growth, the string of significant deals in 2009 gives cause for optimism: it is taking the lead German role on Magna’s acquisition of Opel, for example, with young partner Alexander Schwarz leading. Gleiss has also been involved in most of the major recent restructurings, primarily via partner Andreas Spahlinger.
That Gleiss is turning into a more conventionally geared and managed firm can also be seen in these results. Even though it has grown strongly at the associate level (and raised its leverage year-on-year), the RPL figure continues to rise. As a result RPL is now some 30 per cent higher than in 2006.