Small town firms make it big

Although the big names get the attention, the most important developments this year took place in the Mittelstand.

German lawyers like to pride themselves on their work for world-famous domestic corporates. But in private, most of them will admit that no firm, not even those at the pinnacle of the market, can afford to ignore the group of mid-size traditional companies known as the Mittelstand.

Set up after the war, this core of German industrial exporting power provides not only lucrative fees in its own right, but is undergoing recapitalisation on a scale which no one could have predicted five years ago, bringing a boom of transaction work to law firms.

No country in Europe has seen as much of an explosion of the capital markets as Germany. As the suffocatingly close relationships with house banks loosen up, Mittelstand clients have a huge range of business options, allowing the private equity market to develop in spectacular style.

So who advises the Mittelstand?

The larger law firms, certainly - it is a myth that international expansion is leading to the neglect of core domestic clients - after all, it is the market which international firms most want to get into. However, the bulk of the work goes to small and mid-size firms dotted throughout the country, some in places that even German lawyers have never heard of.

For example, the firm that played a major role in the wildly oversubscribed IPO (Initial Public Offering) of sex-shop queen Beate Uhse was a 15-lawyer firm in Flensburg on the Danish border. A three-lawyer firm in the suburbs of Stuttgart negotiated the huge Austria Tabak-Lekkerland merger. And who are Daimler-Chrysler's corporate lawyers in Germany? A 30-lawyer firm in Mannheim (admittedly together with Hengeler Mueller).

And these are just the more spectacular examples. Until last year Mittelstand firms were not considered attractive partners for international firms because of their size, their limited scope and their antiquated ideas on service delivery.

This year has seen a wave of provincial mergers set in motion, provoked not least by the dissolution of regional bar admission, whereby only locally-admitted lawyers could appear before the courts. Observers are predicting that within two years there will be firms with bases spread around Germany, with additional offices outside the major centres with strong Mittelstand client bases, lawyers with significant international experience, corporate finance expertise and lower fees.

This may sound familiar to UK lawyers, who have witnessed the rise of the national firm. But there is one huge and vital difference. While firms in the City of London can look down their noses at their regional pretenders, German law firms have no such luxury, for the simple reason that there is no City. All German firms are, in this most federal of markets, regional.

The big challenge for this new breed of firm will be whether they can institute the management structures to allow a seamless service. What these smaller firms often have instead is a long-established multidisciplinary approach. Given this head start in financial acumen, the provincial super-firms could prove to be highly attractive partners - if UK firms are ever allowed to touch a firm with (whisper it) accountants in it.