In the zone

Vienna found itself on the right side of the headlines again this year, when a study from The Economist Intelligence Unit named the Austrian capital the world’s second best city to live in. So why did the Economist Group move its regional office from Vienna to Geneva in 2008? Are Klimt, Mozart and Sachertorte not enough?

Apparently not, because The Economist is not the only one. More recently, mobile phone giant Nokia announced it was to move its Central and Eastern Europe (CEE) headquarters from Vienna to Hungary’s capital, Budapest, in an attempt to streamline operations and become more profitable.

“Are we going to see businesses move away from Austria? Yes and no,” says Wolf Theiss managing partner Erik Steger. “If we take the car industry as an example, you see a huge amount of manufacturing done in Slovakia where production is cheaper, but the research side is still done in Germany and Austria.

“So while companies might move part of their businesses east of Austria for cost reasons, most Austrian headquarters are staying put - in the past three years we have seen 50 new companies put their headquarters in Vienna, despite the crisis.”

The danger, Steger explains, is when neighbouring countries start to offer investment incentives that attract Austria’s skilled workforce. He adds that referring to Vienna - or any one place - as a ‘CEE hub’ has become irrelevant in the legal market.

“Where you have your headquarters is becoming less important to how good you achieve integration between these places,” he explains, pointing to the network of firms that have opened up across the CEE and Balkan countries in order to capitalise on the cross-border investment flows in the region. Wolf Theiss itself has just announced the launch of a Warsaw office with the hire of German firm Beiten Burkhardt’s entire Polish team.

“Although our headquarters are in Vienna, our energy is all over the place - we need people capable of transporting know-how elsewhere, just like the Freshfields [Bruckhaus Deringer]s and the Clifford Chances,” Steger adds.

Buddy-minded

Nevertheless, it cannot be denied that international firms looking to develop in the region are still searching for buddies in the Austrian capital. Many key developing markets, such as Romania, the Balkans and the Czech Republic, have relatively undeveloped legal sectors which are dominated by local firms.

“There aren’t many German or UK firms that have successfully managed to enter the CEE region without an alliance with an Austrian firm,” says Philip Hoflehner, a partner at Taylor Wessing ENWC. The tie-up earlier this year between UK-headquartered Taylor Wessing and Austrian firm ENWC gave Taylor Wessing a foothold in six new jurisdictions - Czech Republic, Hungary, Poland, Slovakia, Austria and Ukraine.

“I don’t know why, maybe it’s a question of local experience. You could compare it to an Austrian firm looking to expand in the Middle East - you need contacts and relationships first. We’re right next to Bratislava - there have always been relationships. It’s easier to renew those than start from scratch. Austrian firms went east quite early,” Hoflehner observes.

Having gone east early, Austrian firms are now looking to take relationships to the next level by finding alliances of their own, such as Wolf Theiss’s Polish venture.

“It covers what’s the most important remaining white spot on our map in Central and South Eastern Europe,” said Steger when the acquisition was announced last month. “We’ve seen more and more mandates coming in that would require us to have a presence in Poland. We believe that it’ll assist us in gaining more work and it’ll be credible to the clients.”

But firms are choosing their new friends with care. Wolf Theiss had been working alongside the Beiten team for a year, advising on the privatisation of a Warsaw hospital together before making the big commitment.

“We looked at the market at length but it was always more important for us to do something of high quality than do something in a rush,” Steger stresses.

Likewise, Freshfields has increased its presence in Austria’s legal market through its dominance in Germany.

“In the recession German clients have become more important to Austrian law firms, and we’re seeing Freshfields on the other side of a huge number of Austria-Germany deals,” observes one partner at a local firm. “The strong relationship Freshfields Germany has with German clients, and its reputation as a tier one firm, has seen them more often than other firms on headline deals involving Germany.”

Other international firms, meanwhile, have lost out on the big transactions, notably for their lack of contacts in the Austrian or German market.

“Skadden’s Vienna office sometimes seems like more of a marketing operation for the CEE region,” observes one partner in the area. “They’ve retained the office in Vienna to be the hub of CEE but they are involved in no to very little client work with respect to big Austrian transactions. You can’t say they don’t do any meaningful work, but the work they do do seems to be from outside of Austria.”

Local difficulty

So if a few international firms are losing momentum in Austria, does this mean the small, local firms are laughing? Unfortunately not, explains Christian Herbst, a corporate partner based in Schoenherr’s Vienna headquarters.

“It’s hard for purely Austrian firms focusing on the Austrian market, because most large transactions have a CEE angle,” he says. “So even though Austria is stable - with energy-related and restructuring work booming - it’s not growing in terms of purely Austrian transactions. Firms doing well are those that have concentrated on the CEE region.”

Clearly, the relationship between Austria and CEE should not be underestimated. Several Austrian firms estimate that they earn around 50 per cent of turnover from outside-Austria; some say the proportion of revenue coming from the region is more than half.

Since Taylor Wessing and ENWC merged in May, Hoflehner says there has been a decent amount of restructuring work coming from Hungary and Ukraine, with the firm expecting to profit from Poland’s booming economy in the next year.

The region seems to be benefiting from an increase in litigation work, a trend that has been making its way across Europe ever since the recession.

“To put it bluntly, once companies run out of cash they try and find it somewhere else,” adds Hoflehner. “This will continue for a while, if only because litigation can take some time. Maybe the focus will shift to expansion again once the economy settles.”

Unsurprisingly, nearly every partner interviewed for this report agrees, with many beefing up their litigation departments to keep up. One of those firms is Dorda Brugger Jordis, which has doubled its litigation team in the last few years.

“The dire situation across Europe is making people look at developments in the past because they see a bleak future,” says Dorda’s managing partner Martin Brodey, who also heads the firm’s CEE desk. “The culture for pursuing claims has been getting stronger across Europe ever since the recession fuelled an American-style claims culture.”

Certainly the crisis has seen claims increase and M&A slow down, but there’s no doubting that stability has been the watchword in Austria for some time. Are things set to change? After all, major ratings agency Standard & Poor cut Austria’s long-term credit rating from AAA to AA+ with a negative outlook earlier this year.

“We have a stable and safe environment in Austria, but we’re not immune [to the credit crisis] because the country is reliant on exports,” concludes Brodey, adding that stability will be the watchword for some time yet. “We were concerned in 2009 that the whole banking system would collapse, but Austrians quickly get used to situations and there are intrinsic matters that we can’t influence. There are no signs that the economy is turning just yet.”