Coudert’s bothers

Coudert was delighted to snare top Frankfurt firm Schürmann five years ago. But then everyone started leaving. Is this a case study in how not to merge in Germany? By Jörn Poppelbaum

Schürmann & Partners used to be one of the premier independent firms in the Frankfurt market. It was the referral firm of choice for firms such as Allen & Overy in Germany before the magic circle firm built up its own corporate practice. It had also built relationships with counsel at leading multinationals such as AT&T, as well as with leading German Mittelstand firms such as car hire company Sixt.

In 1998 – just over a year prior to the merger with Coudert Brothers – 0totalled some 52 German partners, both equity and local, and 22 in its overseas offices. With almost 80 lawyers in its home country, it was the tenth largest firm in Germany.

Today? Only 13 partners and fewer than 30 lawyers are left, and four out of its six offices are closed.

The task of rebuilding Coudert in Germany now rests with 48-year-old managing partner Michael Magotsch. Magotsch has tried to instil a new sense of discipline and strength in the ranks. However, to most outsiders it looks like damage limitation. Magotsch is faced with the almost impossible task of correcting mistakes which have been made over years, mostly by Coudert’s management outside Germany, according to former partners.

The extent of the problem is illustrated by the fact that 11 more partners have packed their bags in the 15 months since Magotsch took over.

The real reasons for the demise go further back, however.

Chapter 1: Fiedler & Forster
Five years ago Coudert finally arrived in some strength in Germany. Considering the remarkable international roots of the firm, it was surprising that the US firm had not recognised the importance of a stronger presence in Continental Europe’s most important economic market. A small office in Berlin, manned by only a single partner, Karl Pilny (now at Travers Smith Braithwaite), was hardly a suitable counterpoint to its profile elsewhere as a global legal practice.

The response was the acquisition of the Frankfurt office of Fiedler & Forster (F&F) to its ranks. F&F as a whole had 70 lawyers within Germany – Frankfurt and Munich were the largest offices, but it was a loose association. The Frankfurt office had a strong notary practice and some good local real estate lawyers.

For Coudert it was just the first step. The US management then stumbled on Schürmann as an ideal merger candidate. But the integration of the Schürmann and F&F lawyers turned out to be one of the rocks on which the firm foundered. Lawyers at Schürmann were more highly respected in the market, were generally more international and they tended to look down on their colleagues from F&F. “We treated them as second-class citizens,” reflects one former Schürmann partner.

In an attempt to bridge these early gaps, the former Coudert chairman Anthony Williams in New York appointed F&F’s Hans-Peter Hansen as managing partner in Frankfurt in 2000. But it was not enough to forge peace between the two sniping factions. Hansen gave up the position at the end of 2003 and left the firm this summer to go to Salger Rechtsanwälte, an offshoot of Lovells. Other F&F partners did not fare much better. Of the six partners who came to Coudert, only two are still with the firm. They are shortly due to reach the maximum age limit for Coudert partners, which currently lies at 68.

The F&F deal was not the only problem. According to former partners, the culture of the former Schürmann practice revolved around lawyer legend Walter Schürmann. Described by former partners as “a lone ruler”, he was unexpectedly forced to retire from active business in late 1998. Immediately disputes on the succession broke out. A major power struggle ensued, with various groups of partners trying to muster their troops.

Three major divisions emerged. The first was led by two prominent corporate lawyers, Bernhard Mielert and Rainer Jacob, backed by current office managing partner Magotsch. The second faction was based in Munich and comprised M&A and private equity star Federico Pappalardo and long-standing Schürmann partner and banking lawyer Wolfgang Althaus. (Pappalardo and Althaus moved to Dechert at the start of this year.) The third, significantly smaller group was led by corporate partner Wulf Merkel.

The differences regarding the future of the practice were obvious from the start. Schürmann was one of the last remaining attractive merger candidates in the Frankfurt market and an international merger was almost inevitable. The question was: with which suitor? Arthur Andersen was in the running along with Coudert. Merkel and his allies, however, leaned strongly towards Pinsents. But Merkel was outvoted and consequently left the firm to join Ashurst Morris Crisp (now Ashurst), together with Reinhard Eyring, before the merger with Coudert even took place.

This proved to be the crack in the dam. The resignations went on and on. Of the 50 Schürmann partners who entered into the merger, only seven are still with Coudert, and three of these are over 60.

Chapter 2: Coudert Brothers
Why did the global leadership fail to manage the merger properly? Coudert’s decision to merge with Schürmann was made in 1999 under the longstanding chairman Anthony Williams – a clear advocate of worldwide expansion. Following the merger, Williams sent his colleague Theodore Farris to Frankfurt. Ex-partners see it as a mistake that Farris did not actively promote integration in the major Frankfurt office. Indeed, they regard him as being opposed to the merger in Germany from the start. Farris returned to the US after just one year. “He just sat his year out,” remarks one former Coudert partner bitterly.

In addition, German partners were outraged by the immediate decision to close the successful and very profitable office
in Bonn, which had a highly respected administrative law practice. “Nobody understood the decision in Germany – it just seemed like the international management thought there were just too many offices in Germany without considering how the market works here,” says one lawyer close to the firm. “It wasn’t an auspicious start.”

To make matters worse, the merger contract between Coudert and the German partners stipulated a two-year transition period before a full merger, during which there was to be no financial integration. As a result the German partners were excluded from the firm’s points system as a whole, cutting the German offices out of what some partners regarded as a fair share of the profits made on cross-border deals with the US.

This was masked at the beginning thanks to key Coudert client Callahan Associates, which was investing heavily in numerous cable companies in Germany at the time. The Coudert-Schürmann team working on the Callahan deals, led by Jacob and Althaus, quickly became major turnover generators in Germany. The situation changed, however, when Callahan gradually began to lose its footing in the German market and finally had to give up control of the operator Ish following the insolvency of Kabel NRW in the state of Nordrhein-Westfalen. It came just as the financial integration of the German partners into the international partnership was due to take place in 2003.

In light of the ever-worsening economic conditions, it would have required particular dedication on Coudert’s part to make things work in Germany. But the arrival of UK partner Steven Beharrell as new firm chairman in 2001 did not help the German lawyers’ cause. According to former Coudert partners, Beharrell was not a fan of the German base, partly because it did not generate enough cash.

Then, in 2003, Beharrell was replaced by the current chairman David Huebner. The 43-year-old Los Angeles partner is regarded as interested in the potential of the German practice. It was he who instigated the replacement of Hansen as office manager with Magotsch in 2003. But opinion within Coudert still seems to be divided as to how the situation in Germany should be tackled. German Coudert lawyers complain of receiving few signals that can be regarded as a motivation. “I’m not sure they still know we exist”, says one partner dryly.

Chapter 3: Germany 2004
Considering the hands-off management style of the past few years, it is hardly surprising that major problems have arisen in Germany when economic conditions have been so unpromising. Now, as a result of the ongoing partner departures, Coudert is faced with the danger of developing an imbalanced age structure with a majority of older equity partners. Those who left the firm have, for the most part, taken their clients with them.

According to former partners, the sink in profits is significant; they put the decline in turnover at 52 per cent compared with the previous year. Target turnover was set at $18m (£9.7m) for 2004, but sources say it looks set to be closer to $12m (£6.5m). Managing partner Magotsch, however, denies these figures, stating that the firm is completely on target and that the recent departures have caused no “significant decline” in turnover.

It is a vicious circle. Coudert desperately needs new, profitable partners, but the decline in profits has made it even more difficult to provide potential laterals with an attractive financial package. One recruiter says: “Potential candidates are frightened away by the continuous partner departures.”

Magotsch is seen as a force for change in Germany. He does not mince his words and has no doubt played a significant role in encouraging less profitable partners to leave. A number of ex-partners believe that Coudert would be in a better position now if it had been run by the likes of Magotsch or Huebner earlier. “They’ve recognised the problems, but times are more difficult now. They can’t work miracles,” says one.

Time is running out, and without investment from Coudert worldwide, it is difficult to see how the German offices can get on their feet quickly. But failure to address the decline will leave a global practice without a significant presence in the third-largest economy in the world. Someone somewhere at Coudert has to knuckle down for the
long term.

Jörn Poppelbaum is a journalist on German legal magazine Juve