Germany Special Report: The überfirms

There have been plenty of surprises in the German ­market this year. Parts of Shearman & Sterling sheared off remarkably quickly, while Linklaters went on the attack - with the closure of its highly traditional German head office in Cologne, the recruitment of Freshfields Bruckhaus Deringer partners Ralph ­Wollburg and Achim Kirchfeld for its new Düsseldorf office and an aggressive international strategy, the firm turned up the heat on the leaders of the German market.

For nearly a decade the top flight of ­Clifford Chance, Freshfields, Gleiss Lutz, Hengeler Mueller, Linklaters and Shearman & Sterling formed a rigid structure, but this has now started to creak.

For years the consensus was that Freshfields and Hengeler shared the top spot in the German market. Although Clifford Chance and Shearman & Sterling pressed the leading duo hard in M&A and corporate, and in banking Linklaters was up there at the top, the dominant duopoly was never really challenged.

But the picture has become quite different. Clifford Chance and Linklaters, rather than Shearman, are looking so focused and successful these days that, for the first time, the top of the market is realistically within their reach.

Hengeler and Freshfields are not taking this lying down. Today Freshfields is more strategically unified than ever, while ­Hengeler remains solid as a rock.

One of the main drivers of the change was the shake-up at Linklaters. The closure of the Cologne office was only the most ­dramatic example - the firm also made headlines with the arrival of the two Freshfields laterals, although these represent the consequence of the developments rather than the catalyst. The firm’s starting position will soon give rise to connections to Dax 30 companies, no doubt.

With the loss of key partners and the entire Mannheim office, Shearman had an extremely difficult 2008. But the problems are the firm’s own doing. Although it still has an outstanding M&A track record, integration is still unsuccessful. The Mannheim office (which until 2000 was Schilling Zutt & Anschütz), worked virtually independently even before the split. And lawyers such as Düsseldorf M&A partner Rolf Koerfer and Munich tax ­partner Gottfried Breuninger, who would have been candidates to succeed outstanding corporate lawyer Georg Thoma, ­obviously saw no value in staying at the US firm. Their move to Allen & Overy made it clear that an internationally operating ­practice group can be more attractive than high profits alone.

Firms that operate mainly from Germany have more room to manoeuvre. At ­Hengeler, Gleiss Lutz, Norr Stiefenhofer Lutz and Graf von Westphalen no one’s partner chances are limited because of demands made by dominant offices in London or New York, or even in growth markets such as Dubai. This is why these partnerships grow at a visibly faster rate than in international firms.

Some Freshfields partners have already ­commented that Hengeler has been too ­generous with its partner appointments this year - an astonishing role reversal. Indeed, no one can say with certainty where the limit lies for a firm in Germany - CMS Hasche Sigle, for example, counts 170 ­equity partners and is still growing, but it has also decided to increase its sphere of activity ­significantly.

Wind blowing eastwards

International law firms can, therefore, be seen essentially shifting capacities and younger partners from the west to the east - be this Eastern Europe, the Gulf region or the Far East, including China and India. Even Mittelstand firms have become active here of late, examples being Graf von Westphalen and Brandi Dröge Piltz Suderow & Gronemeyer, which opened offices in China.

Within this market environment, lawyers in Continental Europe are also in an ­unusually strong position. In recent years they have taken wide-reaching steps to focus their set-ups and to improve profit ­margins.

Because of this, coupled with the strength of the euro against the pound and the dollar, German practices are looking particularly profitable by comparison. Firms that do their books in sterling or dollars, however, are paying out lower profits to their ­Continental European partners today than they were a few years ago - in this respect, exchange-rate fluctuations are a double-edged sword.

Even when the euro falls again sooner or later, the current situation is likely to have had a lasting effect on the mentality of ­London and New York colleagues. Many of these have noted over the past two years that European practices are by no means a burden on profits: on the contrary, they can improve them. The voices of European ­partners hold more sway today within firms and play a more important role within ­management and when it comes to expansion than ever before.

The most interesting example of the past year in this regard was surely Lovells’ announcement that the managing partner of its Continental European practice was going to run for the post of international managing partner - in other words, the head of the firm - even if in the end he lost out to a London lawyer.

What was unusual about this was not the fact that Harald Seisler would have been a German in such a position - Konstantin Mettenheimer is already one of two senior partners at Freshfields. But Mettenheimer did not have to win a tough election. Lovells has turned things around in the Continental European practice and is more profitable in the rest of Europe today than in London, exchange rate fluctuations aside. A non-Briton as managing partner is still hard to imagine for many London-based Lovells partners. But Lovells’ Continental partners have cast off their humility as regards their London colleagues.

Aled Griffiths is editor of Juve