German strategy changes

While some foreign firms have failed in Germany, a change in tactics has seen others succeed, writes Patrick Stewart. Patrick Stewart is a freelance journalist.

That Germany is an attractive destination for aspiring international law firms is undeniable. At least three UK-based firms Lovell White Durrant, Eversheds and Dibb Lupton Alsop are looking to set up there, and with good reason.

As Cristof von Dryander, head partner at the Frankfurt office of US firm Cleary Gottlieb Steen & Hamilton, notes: "Germany is the biggest market in Europe and one of the few markets where there is real growth in legal business."

Why then has it been such a tough market for foreign firms? Some big names on the circuit, such as US firm White & Case and UK firm Slaughter and May, shut down their offices in Frankfurt while others, including US firm Skadden Arps Slate Meagher & Flom, scaled back their practices.

Cultural differences offer a partial explanation. The German corporate establishment had little appetite for the gung ho approach adopted by foreign firms when they first entered Germany. On top of this, German firms have successfully restructured their practices, creating large firms through national mergers, improving their IT, learning the value of public relations, internally reorganising practice groups and following their clients abroad. This afforded a degree of protection to the Anglo-Saxon onslaught.

But the one big advantage German firms have, according to Jan Byok, a partner at Wessing Berenberg-Gossler Zimmermann Lange, is their close links with German industry.

Some argue this is changing. Von Dryander believes that the competition from foreign firms is "much stronger than was anticipated". He argues that "traditional loyalties are eroding" as a result of the growing complexity of the commercial and legal environment which requires the specialist expertise that only the foreign firms have.

Chris Kellett, a partner at the Frankfurt office of Clifford Chance, agrees: "Loyalties are breaking down and the expectation is that mandates for big transactions will become more available to international firms."

And foreign firms have been able to capture some prime clients. Cleary Gottlieb, for example, has acted for Deutschebank, Vereinsbank and Deutsche Telecom while Clifford Chance has been retained by Deutschebank, Commerzbank and Dresdner Bank.

The key has been to build up credible German practices and some firms have done so aggressively. Over the last few years, Clifford Chance has raided Wessing Berenberg-Gossler twice for lawyers to fill its Frankfurt and Dusseldorf offices. Allen & Overy, for its part, took on Peter Hein, a partner from Bruckhaus Westrick. Stephen Denyer, head of the practice's Frankfurt office, predicts further growth.

The main issue now is how best to grow a German law practice. Although Clifford Chance and Allen & Overy argue in favour of organic growth, the focus in other firms has shifted towards forging partnerships with German firms.

The Freshfields-Deringer move is the largest to date, though not the first. Doser Amereller Noack has been part of the Baker & McKenzie structure for years, while US firm Shearman & Sterling boosted its German practice two years ago by merging with a small Dusseldorf firm. In the meantime, Linklaters formed a joint venture with its German associate Schon Nolte Finkelnburg & Clemm.

Some doubt whether Freshfields' route is the best way forward. Denyer refers to it as a "half-way house":"They have announced only an alliance which is supposed to lead to a merger in two years. That leaves a long period during which strains and tensions could emerge."