One of Frankfurt's better restaurants. Finely shaved truffle. An excellent bottle of Chassagne-Montrachet. Thankful for the fruits of their labour, two senior lawyers from an international firm are debating whether in-house lawyers will ever really be able to escape from the role of troublemakers and nay-sayers and into the high-speed, higher-value world of M&A.
“This sort of thing goes in circles,” claims one. “It's a phase that in-house departments go through, before being cut down to size again by their boards.” His colleague sitting opposite is less confident. He has just come out of a transaction where he experienced the in-house lawyers at E.ON Energie, the largest energy conglomerate in Germany.
Just how far ahead the E.ON Energie lawyers are compared with some of their colleagues in other corporates can be gauged by the reports of their work on the acquisition of Fortum Energie in June this year. With a turnaround speed that M&A lawyers at law firms like to think is their own private preserve, Michael Bartsch and Erich Barzen stepped deftly around the bidding process and sewed up a deal with Fortum, the Finnish owner of the Westphalen utility Wesertal, and so plugged a gap in E.ON's coverage of the German energy market. “For antitrust reasons we had to close the deal quickly in order to stop the bidding process,” says Bartsch with disarming frankness.
Marius Berenbrok, the Freshfields Bruckhaus Deringer partner who is Fortum's lawyer, was faced with just the E.ON Energie team, this time without the lawyers from Allen & Overy (A&O) who had been at the company's side during the first stages of the auction. “I was called in after Fortum had been negotiating with E.ON for two weeks,” says Berenbrok. “Bartsch and Barzen continued without an external lawyer.”
Cornelius Fischer-Zernin, now managing partner at A&O, remained on call for E.ON Energie and has no hard feelings. “They're exceedingly competent,” he says. “I'd be happy to see more lawyers who are that professional at other in-house departments.”
Close to the coalface
That was just the beginning for the lawyers at E.ON Energie. Shortly after the Fortum deal was closed, the in-house legal department was reorganised, leading to a slimmer team with only seven lawyers in contrast to the previous figure of 25.
But most interesting for German law firms was the formation of an M&A department, which brings together a multidisciplinary team numbering some 30 professionals. Although only 10 of these are fully qualified lawyers, a significant number of what was the in-house legal department is now concerned almost exclusively with handling the constant flow of transactions and integration work that stems from E.ON Energie's onward march through Europe. As a result, controlling and valuation are closely tied in to the new M&A structure.
“It came about as a consequence of the restructuring of the company as a whole. Work is now defined and organised much more strongly along business processes,” explains Bartsch, who is enthusiastic about his new area of activity. He is head of European M&A, with a particular focus on Germany, Austria and Switzerland. “Bringing together lawyers, businessmen and operative experts has been a huge gain for know-how transfer,” he adds.
The consequence for law firms is clear: E.ON Energie has less need to use outside firms when its own lawyers are given as much freedom and responsibility as Bartsch.
Bartsch himself began his professional career in 1985 at PreussenElektra after a PhD in antitrust law. Although in those days the department was, in the words of one outside lawyer, “traditionally structured”, the lawyers enjoyed a far higher degree of hands-on experience than at some competitors.
“The in-house department was outstanding and even in those days particularly self-confident,” remembers Andreas Röhling, a partner in Freshfields' Cologne office who has worked with Bartsch for years. “At Preussen, the in-house lawyers were always strongly involved in the operative side of the business and the cooperation between the two sides was always seen as constructive,” he continues, hinting at the conflicts that often arise at other German companies with strong in-house departments.
The creation of an M&A department at E.ON Energie is the logical development of a structure and culture already present in the company. Bartsch emphasises the qualities that are expected of those who work in the department as “be entrepreneurial; check out the risks; make a decision”. He also describes the activity of its members as going some way beyond mere negotiation, especially in the energy field, where acquisitions are often tied up with privatisations or where dealing with local authorities as important shareholders is necessary. “You have to make contacts with local politicians and, for the most part, we do the company valuations ourselves,” he says.
But it is the antitrust background of Bartsch and some of his team that is most important. Christoph von Teichman at Latham & Watkins SchöNolte has met Bartsch on a number of transactions and describes him as “unbelievably experienced and a truly outstanding antitrust lawyer”. Bartsch himself is forthright on the need for both legal and industry knowledge. “The how and why of energy acquisitions is often determined by antitrust,” he says. “You have to know how the energy business as a whole functions and have an understanding of the operative field.” The result is that E.ON Energie very rarely has to instruct law firms for antitrust – even the European issues are handled in-house. The only exception is specialised questions on foreign acquisitions and antitrust authorities.
The work of the M&A department, however, covers the more traditional management of the post-acquisition process. Barzen describes the need for additional input after the closing of the transaction. “There are particular ways of doing things in the company which the new subsidiary has to be made familiar with – reporting structures, accounting standards and so on,” he says.
Clients as competition
Few corporate lawyers will be losing sleep about post-acquisition work. But they would get goosebumps if they could sense the self-confidence that bristles throughout the M&A department at E.ON Energie. Asked straight out if lawyers should be worried about the establishment of such departments and whether they represent competition for law firms, Bartsch is blunt: “Of course one can see it that way. There is much which we used to give out to law firms which we now do ourselves.”
Both Bartsch and Barzen are openly critical of some of the trends in M&A advice, not least because they are in the position to negotiate, draft contracts and close the deals themselves. On contracts, both are particularly withering. “Anglo-Saxon contracts were introduced by law firms, not by in-house lawyers. They haven't enriched our legal culture,” says Bartsch. This new in-house breed has assigned law firms a clearly defined role in M&A transactions, and it turns the traditional relationship on its head. Law firms are there to lend support and they add value not through simply providing legal advice, but through their market knowledge.
Elite or avant-garde?
It would be easy to dismiss such cutting-edge departments as E.ON Energie's as a small minority among the German in-house community. Few corporates have the thirst for acquisitions that this company does. In addition, growth for such an in-house multidisciplinary partnership is relatively limited, as Bartsch admits. “At the moment we can do just fine with the amount of people that we have. If we want to stay efficient, the department shouldn't get too broad,” he says.
But law firms should not be too blithe. The amount of business that such M&A departments will take away from German law firms is relatively small, but it is, on the other hand, a highly important part of their business. Companies such as E.ON Energie are the ideal client for law firms with large M&A departments and a high leverage to support, since they provide constant deal flow and full utilisation.
But just as important are the reasons for the emergence of an M&A department such as that at E.ON Energie. The structures were put in place in order to exploit the deal-making competence already present. It thus underlines the necessity of such new fields of responsibility and practice areas in order to attract and maintain the best young lawyers. Just as the leading M&A firms have to offer their rainmakers deal-making opportunities beyond the purely legal and allow these lawyers the space to exploit their skills beyond the law, something similar is happening at German companies such as E.ON Energie. They are finding that not only do deals run smoother with a multidisciplinary approach led by in-house lawyers, but also it offers its stars the reason to stay because their work is close to the action.
So lawyers in Frankfurt have much to chew over as well as their evening meal. If the work of a newly-formed M&A department at an energy corporate can draw so much attention, just imagine what would happen if an investment bank did something similar.
Aled Griffiths is editor of German legal magazine JuVe Rechtsmarkt