14 August 2000
Frankfurt may still suffer from an image problem, but its banking and finance legal market has developed rapidly over the past five years. Aled Griffiths charts its progress.
Unless you love apple wine, you're a student of 19th century German democratic movements or your footballing passions extend to supporting Eintracht, then Frankfurt still has an image problem.
"A provincial market town with some skyscrapers which landed here by accident," is how one English lawyer describes his foreign posting.
Only a few years ago it would have been difficult to find 100 lawyers in Frankfurt whose practices were predominantly in banking and finance. Now, Clifford Chance Pünder is aiming to have that number on its own books by the end of 2001.
It is a sign of how far the German banking and finance legal market has developed in the past five years. Not only are these banking departments among the fastest growing in Frankfurt, but the number of banks and finance houses attracted to the region means that firms have found work dropping into their laps.
The three letters on everybody's lips are, of course, IPO - initial public offering. It is common knowledge that German companies have traditionally financed themselves through a close relationship with a house bank. It was only in the 1990s, when the possibilities for export and growth multiplied, and banks themselves had found more profitable ways of making money, that companies began to look to the international capital markets. Since then, the equity markets in Frankfurt, particularly the junior Neuer Markt, have exploded.
It took time for law firms to react to these developments. This was because practices in equity capital markets had traditionally grown through advising companies in the run-up to an issue, with the work being carried out in their corporate departments. The banks, if they had outside counsel at all, were advised by a small circle of firms in Frankfurt.
"Much of the work for law firms in the early 1990s was based around syndicated loans. We did a lot of work on conduit structures to countries such as Italy," says Christoph Schucking, a partner with CMS Hasche Sigle Eschenlohr Peltzer Schäfer. "We were called in by London banks to advise on the credit risks in the early 1990s after unification. The capital markets work then was nothing in comparison to now."
The way in which some firms now concentrate such work in their banking and finance departments, as opposed to their corporate departments, is instructive for the banking field as a whole. That is, while a large number of issuers will be accompanied to the bourse by their house law firm, an increasing number are being advised by law firms with track records that are acceptable to the issuing bank.
Bruckhaus Westrick Heller Löber (now merged with Freshfields) and Shearman & Sterling are leading the pack on issues on the Neuer Markt and Regulated Market. Bruckhaus advised on 46 issues in 1999 and the first quarter of 2000. Together with the 26 of Deringer, the newly merged firm is way ahead of its competitors on sheer numbers of transactions. Shearmans managed 32, as well as a host of transatlantic offerings and issues on the Swiss and Austrian exchanges.
Shearmans and Bruckhaus both had roots in the regions throwing up the old-economy companies going to the market. In other cases, the firms struck deals from relationships that were built with lead underwriters in previous transactions. Bruckhaus also has the advantage of having one of the most powerful practices in information technology and telecoms, giving it a sure foothold in the new economy.
"Bruckhaus does have a strong IT and telecoms practice, but the success with the Neuer Markt IPOs stems also from the track record of its banking department in high-tech and bio-tech IPOs," says Tobias Mueller-Deku, partner in the Bruckhaus finance team. "In addition, once we have done the various financing rounds on a venture capital investment, we are likely to do the going public as well."
German law firms are therefore witnessing a convergence in their practices. Having a strong banking and finance practice is of increasing importance for corporate finance work. This in turn is beginning to dominate the historic mainstay of German law firms: traditional and academic company law where practitioners are rarely brought face to face with the financial interests of their clients.
While this tendency can be most clearly seen in equity capital markets, similar cross over is happening in areas such as securitisation, project finance and debt capital markets, where law firms have only recently started to seek to advise originators as well as arrangers.
Firms such as Gaedertz and CMS Hasche Sigle have managed to build a modest securitisation practice over the past year, advising originators with which they have long had contact, as well as benefiting from referral work from US or UK firms.
Feddersen Laule Ewerwahn Scherzberg Finkelnburg Clemm started its Düsseldorf office with two in-house lawyers from Thyssen and built up a project finance practice advising heavy industry in the Ruhr. But after its recent merger with White & Case (a LLP) it now has access to the other side.
Norr Stiefenhofer Lutz has made a name for itself in the nascent high-yield market in Germany thanks to the work it has done for Fresenius. In all these cases, the developments are being driven by the need to provide all-round finance skills for their corporate clients.
This is only a first step. Banking and finance in Germany, like other fields of law, has been markedly affected by international mergers.
Banking lawyers at Pünder, for example, are being integrated into one of the world's most powerful finance practices at Clifford Chance. "Banking and finance is obviously one of the main winners from the merger in Germany," says Peter Scherer, a Pünder partner. "We are being flooded with new clients, but also much more interesting work. I have to admit that we underestimated just how much more we would be able to do, be it in regulatory e-business, capital markets, derivatives or acquisition finance."
Oppenhoff & Rädler Linklaters & Alliance lawyers in debt capital markets have already reaped the benefits of Linklaters' client list. Berthold Kusserow at Oppenhoffs says: "Major growth areas continue to be in IPO work, as well as acquisition finance and corporate bonds, especially high-yields and convertibles, even though there is still debate as to whether there is a big enough market to place the high-yield products."
Feddersen Laule partners, on the other hand, now have acquisition and project finance expertise at White & Case with a depth the firm could never have hoped to build up on its own.
In European terms, however, all eyes are on the newly merged Freshfields Bruckhaus Deringer (FBD). For pure German work, it now has a formidable team. It also has access to a respectable international banking practice with a strong reputation in project finance and securitisation.
What happens to the FBD practice in Germany is seen as highly significant. Some observers have warned that Freshfields' corporate strength could overshadow the Bruckhaus Deringer banking team, but Mueller-Deku disagrees. He says that the strength of the German finance market has been partly built up through its independent identity.
"There are of course a number of 'me-too' products where Germany is just following the trends in the UK. But there are also highly original products where the really interesting issuers and investors are in Germany. For example the 'aktienanleihe' [a form of reverse convertible] offers particular forms of options and managed certificates. These are conceived in Germany and then marketed Europe-wide from here," he says.
While outsiders suspect that Clifford Chance Pünder could lay more emphasis on finance than Pünder's traditional corporate skills, they also question whether the corporate strength of Freshfields could set some boundaries to the Bruckhaus Deringer banking practice in Germany. Lovells, by contrast, has the advantage of a smaller but well-balanced corporate and banking practice and has found in Boesebeck Droste a similar German partner with untapped potential in the finance field.
Boesebeck, as one of the offices with a real Frankfurt heritage, has strong relations to Commerzbank and the regulatory team is well-rated. There is also considerable potential leverage in the firm's litigation and private equity practices.
Meanwhile, seemingly oblivious to the goings-on around it, Hengeler Mueller Weitzel Wirtz carries on expanding its practice with the cooperation primarily of Davis Polk & Wardwell, as well as Slaughter and May. It has been a highly successful model, albeit with some limitations. There has been a tendency, for example, for Hengeler's lead clients to choose their own US counsel for the big-ticket capital markets issues, such as the succession of Deutsche Telekom issues where Deutsche Bank picked Sullivan & Cromwell.
However, Davis Polk did pop up when Hengeler advised such luminaries as Linde, Stinnes or Software AG.
"A key advantage of our arrangement with Davis Polk is that we are flexible," says Hengeler's Torsten Busch. "Sometimes one of us is conflicted out, sometimes the bank or the issuer has a long relationship with another firm, like Deutsche Telekom's preference for Sullivan & Cromwell acting together with us for the underwriters. We do believe, however, that the banks recognise that there is an advantage in efficiency and costs in using us."
It is unlikely that any other firm will be able to follow the neo-isolationist position of Hengeler. With notable banking firms such as Norton Rose looking for German capability, and banking lawyers being wooed by other US firms setting up their own offices, an international link-up is vital for leading German firms.
And given the increasingly close link between areas of practice previously kept separate, an international dimension is important not only as regards classical banking work, but the corporate finance field as a whole.
German banking lawyers now recognise that it will increasingly be the case that German law firms' products will only be able to sustain themselves insofar as they are part of an international practice.
"Almost every capital markets issue has a cross-border aspect nowadays. Equity issues will usually be a public offering here with a substantial private placement aspect abroad," says Schucking of CMS Hasche Sigle. "In addition, the regulatory authorities work much closer together. Non-compliance in Germany has consequences in the UK as well."
The new breed
This is only part of the battle, however. Truly multi-cultural banking practices are a new breed and a factor in the legal market - up until now almost every international practice of note has been completely dominated by either UK or US law.
Although London law firms have found it imperative to build up a US capital markets practice, this has not yet gone far beyond a mere execution capacity and US firms have not had to have any meaningful international element thanks to the size of their domestic market.
One exception is Cleary Gottlieb Steen & Hamilton. "Our firm has had a strong presence in local legal markets in Europe for decades. Offering German banking and capital markets law was an obvious step for a multinational partnership," says partner Christof von Dryander. "I don't see the expansion of other US firms as a defensive move. We are in the middle of an extraordinary boom in Europe and there is a lot of business to be had - it is a big pie, after all."
The merger of major German and London banking and finance practices means there will be more and more firms with dual and triple capability, where each jurisdiction is for the first time equally represented.
For the first time therefore a coherent firm-wide multinational strategy has to be found which can grow as many parts of the practice as possible instead of exporting the legal techniques and jurisdiction of one particular country.
"Our business plan works on the basis of expanding our services in banking and finance across a wide front. That means that we, as German lawyers advising on German law, will push these products. We are not going to make ourselves redundant, especially since the demand is clearly there," says Oppenhoff's Kusserow.
Such growth is less of an issue for German firms in areas such as equity capital markets and the increase in public takeover work will also fall naturally into some of the M&A and finance practices.
Bruckhaus's Gunnar Schuster says: "There will be a wave of consolidation on the Neuer Markt. A number of companies are already the focus of interest from foreign investors. The end of 'Fortress Germany' now means there is a level playing field for public takeovers. Obviously we are now in a much stronger position to offer integrated cross-border advice."
There is a difference in fields such as acquisition and project finance, as well as debt capital markets. This is because these are areas where a huge potential exists for German legal advice. Some German lawyers argue, however, that this potential will be exploited only if German law products are developed which are both encouraged within the newly merged firms and marketed aggressively to clients.
Traditionally, it has been this last element which has been the biggest hurdle for German law firms. Because the in-house departments of the domestic German banks were traditionally so huge, banking and finance practices only developed when the international investment banks arrived in Germany in force some 10 years ago.
As a result they have only been able to react to developments, carrying out the German side of international transactions or riding the wave of the German banks' growth.
"Nearly all of the equity capital markets work was domestic and therefore done in-house up to the early 1990s," says Busch of Hengeler Mueller. "It was in particular the establishment of the 144a Rule issues which really pushed the international market forward for German firms - it made the German market more attractive for the US investment banks."
However, there have been other areas where firms have built up a reputation in the market for producing legal products that have helped to increase the flow of similar work into Germany. The securitisation practice at Hengeler Mueller, acquisition finance practice at Baker & McKenzie and asset finance practice at Bruckhaus are three examples.
Bruckhaus also played a lead role advising the arrangers on the first German project finance deal under US GAAP last year, a deal that is expected to pave the way for expansion in the relatively dormant domestic market for project finance.
But the establishment of international firms with major banking practices in Germany means they have access to clients without having to go through UK house-firms whose interests lay in diminishing the importance of German law firms in transactions.
This tendency was, of course, a result of the fact that any finance transaction with a placement element had to be under New York or London law in order for it to be sold or syndicated.
But with the extraordinary growth of the asset management sector - predicted to be worth DM2,000bn (£612bn) by 2003 - German lawyers are about to benefit from an explosion in investment.
Kusserow says: "There has been a trend to use German products for institutional investors for some time, but it has really boomed over the past three or four years. Insurance companies are demanding German law for their structured products."
The result for some German lawyers is a fundamentally different situation. As far as personal interests and London fiefdoms allow, the merged firms are going to have to find ways to push their German teams into the international limelight.
In this they may enjoy some support from their clients. It has been highly noticeable in interviews undertaken by German law magazine Juve with investment banks and equity houses, that they are undergoing the same growing pains.
"It took a lot of persuasion of my colleagues in New York and London that it was worth building up Frankfurt with German bankers. I see us as being at a competitive disadvantage if we do everything from London, but not everyone agrees," says a banker at one of the major investment banks.
Whether these institutions increase the size of their German finance practices, and whether it takes the form of international products being applied to Germany, or indigenous products being allowed to develop, is to a significant extent a matter of policy. As such it is the subject of debate within the banks, which law firms, firstly as important advisers and secondly as product-providers, influence.
As far as the newly merged international firms are concerned, German lawyers are looking to educate partners in London and in the future even in New York as to the huge German finance and capital markets potential in their ranks.
But they admit also that in order to do this, German finance practices will have to demonstrate the same client response, documentation flexibility and transaction management skills as their UK and US colleagues.
"German law firms are today much better at having standard contracts and prospectuses on their system, but there is still room for improvement," admits Busch.
Despite all the advances made by German firms in this respect over the past few years, banking clients still say they lag behind their UK and US counterparts when it comes to key skills. "Good US lawyers, and increasingly Londoners as well, have the sort of disclosure experience which can help them to push the transaction on," says one self-effacing German lawyer.
"David Rockwell at Sullivans is a good example," says a Hengeler observer. "He really got the Infineon deal done - the German lawyers on the Siemens side were nowhere."
The huge IPO of the Siemens semi-conductor spin-off is therefore a good example of an international finance transaction which went to Anglo-Saxon lawyers.
Part of the management job in integrating the Frankfurt and London practices will be to analyse how far German banking practices will have to adapt their internal structures to mirror that of US and UK practices.
The open question is whether instilling a transaction management culture could depend partly on sheer manpower. As one A&O lawyer puts it: "If you want to compete for work from Goldmans and JP Morgan, then it's about a particular sort of service, and you will only be able to get that through leverage."
And there's the rub. Some German lawyers like to emphasise how their clients want legal skills as opposed to speed. But because the latter is now almost being taken for granted, other Frankfurt banking lawyers claim it cannot be ignored.
"Firms here might be able to raise their leverage, but not in every field. In debt and securitisation work it makes sense, but not necessarily in equity capital markets or M&A," says Busch, concluding: "It is in general less easy for German firms to raise leverage when the partner track is so much shorter. By definition most German firms don't have a lot of five- or six-year associates whom they can leave to steer a transaction."
Integration, cooperation and business development of the new German-UK banking and finance practices is no simple matter.
But as one Frankfurt lawyer at a newly merged firm says: "As long as our new London partners realise that they will profit from learning from us as well as the other way round, I think we'll be fine."
Hengeler Mueller Weitzel Wirtz
Regarded as the grandfather of the German banking law scene, Schneider's influence on the German market has been remarkable. He is universally admired for building the Hengeler Mueller banking practice, as well as for his academic excellence and outstanding client skills (as well as an impish sense of humour). Links to Deutsche Bank are legendary, and Hengeler Mueller has also set up most of the leading international investment banks in Frankfurt. Relations with JP Morgan and Morgan Stanley are particularly strong.
Seen by many as Schneider's natural successor, Haag has a leading reputation for his work in the bank lending markets, even if Hengeler Mueller was a little slow in getting its acquisition finance practice off the ground. He also carries weight within the partnership as a whole: he has been Frankfurt managing partner for some time.
Freshfields Bruckhaus Deringer
The combination of two of Frankfurt's most highly respected banking lawyers could be electric. Kunig is seen as having played a similar role at Bruckhaus as Schneider does at Hengeler Mueller, and has overseen an extraordinary growth of the banking and finance practice over the past five years. He is active mostly in regulatory and capital markets work, but has lent his weight to the securitisation practice as well. He has good relations with a wide range of banks, including Chase, Lehman and Dresdner.
Feuring was originally one of the stars of the Deutsche Bank in-house department, joining Deringer in 1991. He is credited with having played a major role in building up Goldman Sachs in Frankfurt and relations remain close. He has an outstanding reputation for his work in equity capital markets.
Oppenhoff & Rädler Linklaters & Alliance
Originally a corporate lawyer, Kusserow joined from Pünder as an associate, much to the latter's chagrin as it turned out. He is one of Frankfurt's most popular banking lawyers, with clients who are always happy to comment on his convivial nature. He is now the senior Frankfurt banking lawyer who has not only maintained close relations to Commerzbank, but has also extended the firm's reach so that it is challenging Hengeler Mueller in debt capital markets work - something which would have been unthinkable five years ago.
Clifford Chance Pünder
Having worked in banks in London for years, Scherer came back to Pünder and has built up one of the top derivatives and regulatory practices in Frankfurt. Jovial and popular, Scherer is known for his work across the whole debt and fixed income scene, and was recently responsible for advising on the establishment of the Leipzig Energy Exchange.
Cleary Gottlieb Steen & Hamilton
Christof von Dryander
All the leading banking lawyers in Frankfurt have traditionally come from long-established German firms, with the exception of von Dryander. He started in the Brussels office at Cleary Gottlieb, moving to London in 1985, and then set up Frankfurt in 1991 as a partner. He has seen the Cleary Gottlieb practice become one of the most highly-respected in the city, even if it remains small. Regulatory and capital markets work are his principle focus, and his work on hybrid capital structures has attracted wide acclaim.
CMS Hasche Sigle Eschenlohr Peltzer Schäfer
Another banking lawyer who has grown up with the expansion of the field in Frankfurt, Schucking also has a number of strings to his bow, ranging from all-round banking advice for some of Frankfurt's best known private banks, to playing an important role in the strong growth of the IPO practice. Widely admired for his loyalty, many believe that Schucking could have got jobs at some of the better known banking firms.
Baker & McKenzie/Döser Amereller Noack
Having possibly not the most pre-eminent international network to work with in banking and finance, Magold is credited all the more with building up a highly focussed group in Frankfurt which has for some years been a market leader in acquisition finance and project finance (both major growth areas for the future in Germany). He has a reputation as immensely hard-working, but he has been given support over the past two years thanks to stronger growth in the department.
Weil Gotshal & Manges
Although Tobien has only just joined what is at the moment still only a two-partner office (Weil Gotshal has not even moved into permanent offices yet), he is worth mentioning due to the shock which was caused by his departure from the Takeover Commission of the German Stock Exchange (he thus played a central role in the Vodafone/Mannesmann deal). Before that he had been involved in listings regulation, and is thus well known to every banking lawyer in the city. Highly praised for his pragmatism and business-like approach, even if some were surprised that he chose to go into private practice.
Shearman & Sterling
Known as the 'whirlwind' of the Shearmans IPO practice, Hutter is actually a dual-qualified Austrian and US lawyer, who has nevertheless been at the head of a team in Frankfurt which has surprised everyone by the number of deals it has been able to handle. Other than the odd foray into debt capital markets work, the Shearmans banking practice is relatively restricted, but Hutter's reputation is all the more remarkable for that.
Hengeler Mueller Weitzel Wirtz
To call Krauss a rising star is slightly ridiculous. He has for some years been seen as the securitisation guru of the German market, but he has only recently begun to be more widely known, overshadowed as he was by his illustrious seniors (although he is in fact only slightly younger than Haag). Krauss is now best known for his invention of highly sophisticated (and fiendishly complicated) new structures in a number of fields, the most prominent being on the euro clearing system.
Softly spoken and unassuming, it is Busch who has been the most noticeable figure in the Hengeler Mueller charge in the equity capital markets field. He has impressed both clients and competitors over the past year and has the backing of a number of younger partners of similar experience. Many in Frankfurt are wondering whether Hengeler will now make a more concerted attack on the Neuer Markt work with Busch et al (the concentration has been on big-ticket international work until now - just the sort of issues which could go to London after the stock exchange merger).
Freshfields Bruckhaus Deringer
Bruckhaus has been able to churn out young, highly motivated (and gregarious) partners almost at will over the past few years, and Mueller-Deku is one of the most visible. Consistently recommended by banks who have either instructed him themselves or seen him on the other side of the transaction, he is one of the huge team of IPO lawyers at Bruckhaus. He is also one of the curiously large band of Bruckhaus lawyers who speak Japanese.
Although a number of his competitors have remarked that he was almost too softly spoken to fit into Bruckhaus, Schuster is highly admired both in and outside the firm. He is seen as the rising regulatory star in Frankfurt with particular expertise in public takeover work.
Clifford Chance Pünder
Another lawyer whose age belies the influence she has had on the market. Jury was described by one Hengeler lawyer as "the queen of acquisition finance". She has been in-volved in the financing of a huge number of deals and together with the team at Baker & McKenzie, is some way ahead of the competition.
Oppenhoff & Rädler Linklaters & Alliance
Another dual-qualified US-German lawyer who has come to the fore (with colleague Christoph Vaupel) in Oppenhoff's rapidly expanding equity capital markets practice. He was described as "dynamic" and "highly promising" by one experienced Bruckhaus lawyer and is credited with having catapulted Oppenhoff's equity practice into the top league in only a few years. This might have something to do with his work-rate - last year he is reported to have billed more than 3,000 hours.