UK firms go Deutsch

Germany offers many attractions for UK law firms with an international agenda. Ryan Dunleavy discovers how far they have gone towards securing a slice of the lucrative German market and the possible pitfalls which could hinder plans for further expansion.

UK law firms are in a race to dominate the German legal market. This year has already seen Clifford Chance become the largest firm on the planet following its merger with 125-partner German firm Punder Volhard Weber & Axster and US firm Rogers & Wells. And Freshfields' “immensely important” merger with Cologne-based Deringer Tessin Herrmann & Sedemund has also been completed.

Freshfields' merger aspirations are thought to extend beyond 36-partner Deringers. Every partner who was interviewed from German practices or UK firms with German offices speaks of Freshfields Deringer being in serious talks with Germany's largest firm, Bruckhaus Westrick Heller Laber.

Freshfields chief executive Alan Peck says: “We are very happy with Deringers, but we must get bigger in Germany. We would consider a three-way merger.”

Bruckhaus partner Burkhard Bastuck den-ies the rumours, but he does admit that the firm is considering how to get a UK law capability.

Markus Hartung, managing partner of Linklaters' alliance firm Oppenhoff & Radler, says that a merger between Freshfields Deringer and Bruckhaus would give the firm an awesome presence in the German market and will lead to further consolidation from competitors. Bruckhaus opened an office in Munich this year, a city that Peck says is a high expansion priority for Freshfields.

Perhaps that is why Linklaters has pushed forward its planned merger date with Oppenhoffs from 2003 to 2001 at the latest.

Even Slaughter and May is thought to be considering a break from its usual strategy of non-expansion by going into full merger with Hengeler Mueller Weitzel Wirtz, its “best friend” in Germany.

This is denied by Andrew McClean, the only Slaughters partner with a permanent role in Hengelers' office. “Talks about a merger with Hengelers concluded that it is not a goal,” he says.

However, many lawyers think Slaughters will eventually have to merge to sustain its position in Germany.

Andreas Austmann, a partner at Hengeler in Dusseldorf, says his firm has thought of a UK merger and has isolated Slaughters as its preferred partner. But he adds that a merger is not the chosen path at present.

Hartung, however, says the firms are already merged in all but name. “They have the same document management and IT systems. They have a very close relationship but are keeping their brand identities.”

Allen & Overy is also attempting German expansion by frantically recruiting German lawyers to bulk out its Frankfurt office, which has doubled its number of lawyers in the last 18 months – it now totals 42.

Stephen Denyer, A&O's European regional managing partner, says: “We want to grow. In the long run it would be conceivable to see A&O with more German offices.” But he rules out merger as an option.

Second-tier UK firms are also trying to push their way into the market.

Lovells merged with national German firm Boesebeck Droste Rechtsanwalte late last year and Ashurst Morris Crisp opened an office in Frankfurt two years ago and is hiring at speed – in the last few months it has poached two partners, Reinhard Eyring from German firm Schurmann & Partner and Hans Gunther Nordhues from Clifford Chance.

Meanwhile, firms such as Eversheds and Norton Rose are stalking the market looking for German merger partners. As Tim Maloney, international business director at Eversheds, says: “Germany is the most important market for the top UK firms to move into now. They must go in.”

Entry into the market is attractive because Frankfurt is the third largest investment banking and finance centre in the world, after London and New York. It also exports more than any other EU country and its output from industry is the largest in the EU.

“However, the main advantage,” Peck says, “is that Germany is 15 years behind London, but its progress is quicker. It is trying to cram 15 years of progress into five years. That means it is going to be the source of a lot of work for lawyers.”

But UK firms should not think it is an easy market to break into. Magic circle firms learned their lesson in the early 1990s when they failed to break the dominance of German firms over the market despite opening offices. Indeed, Slaughter and May closed its office in 1995 only three years after opening it.

And Clifford Chance, Freshfields and Linklaters could not expand significantly without mergers and alliances, while A&O is still plugging away with the theory that organic growth will pay off in the end.

German firms remain the leaders in the market for many reasons, not least because the structure of the country's legal market is very different from the UK in that it is highly decentralised.

Lawyers in Dusseldorf tend to specialise in issues connected to heavy industry; Berlin is the centre for administrative and public law and is a key area for property law; Frankfurt firms tend to specialise in heavyweight corporate, capital markets, banking and property work; Stuttgart practices generally handle administrative and corporate law; Munich firms are known for dealing with high-tech IP and tax work; Hamburg is a centre for industry, IP and media law; and Cologne firms tend to specialise in insurance, media and industry law.

UK firms cannot control the market without being active in each of these cities. So far they have only tapped into the German market on a limited level and will not be able to advance further without significant investment.

The large German firms that have a national presence retain a firm grip over the market. The three key players are Bruckhaus, Hengelers and Gleiss Lutz Hootz Hirsch Rechtsanwalte, none of which has a formal alliance with a UK firm. Without mergers and associations UK firms have only been able to rival these practices on Frankfurt-based international client work.

Another major problem for UK firms is recruiting top quality German partners.

“Firms that want to enter into the German market must use German lawyers,” says Austmann. Germany has a civil law system that is radically different from the UK common law.

“But so few partners want to join UK firms,” he adds. This may be because German firms have different cultures.

“A typical new recruit is between 28 and 30 and sometimes older,” says Denyer – in the UK, lawyers start a training contract at about 22.

And the civil law system requires greater knowledge of black letter law, which fits in well with the more academic minds of German lawyers rather than the more problem-solving analytical approach of those in the UK.

German clients also demand a different type of service to what UK firms are used to delivering. “There is a closer contact between partners and clients,” says Aled Griffiths, editor of German legal magazine Juve Rechtsmarkt. Proof of this is that the partner to assistant lawyer ratios at German firms average about 1:2 – in the UK it is more like 1:5.

Most of the clients that UK firms are trying to attract are German businesses.

Frankfurt seems to be the only area where UK firms have gained a toehold without having to merge. But the city is an anomaly. Thirty per cent of its inhabitants are foreign and the majority of the work there for UK lawyers is driven by international banks.

But there are signs that the whole German market may be set to become less federalised. The German government is debating whether to scrap capital gains tax on the sale of stakes in domestic companies and executives are already bracing themselves for a restructuring of corporate Germany.

Once the tax goes, it should allow companies to sell their non-core holdings and become more shareholder value oriented. “It will make a big difference if the tax goes,” says Peck. “There will be a lot of corporate activity.”

Maloney adds: “Since 1 January it is permissible for lawyers in one part of Germany to practise throughout Germany. You will see a lot of rationalisation and the formation of large cross federal state firms.” Lawyers predict that this will break up the market and make it easier for newcomers to gain legal work.

But there is no guarantee that UK firms will be the ones to gain the most from the changes taking place. A raft of German firms have already gone into domestic mergers over the last few years, including Hasche Eschenlohr Peltzer Riesenkampff Fischatter with Sigle Loose Schmidt-Diemitz, Gaedertz with Sehon Nolte and Wessing & Berenberg-Gossler with a number of smaller firms.

But Germany remains a valuable market for UK firms with an international agenda. The only problem is that it is harder to gain significant strength in Germany than may have been first envisaged. The UK firms that swept into the country on a wave of optimism in the early 1990s failed to expand significantly enough to enter the major league of firms.

Experience shows that merging with established German firms may be the only real way to dominate this market. But even this remains to be seen. The German legal market is tight and UK lawyers should not underestimate it.