Willing and stable
26 March 2012 | By Joanne Harris
Austria has weathered the economic storm well, with energy, restructuring and compliance work taking the place of big-ticket transactions
The theme in the European legal market over the past year has been one of change. Law firms have merged, splintered, hired and lost partners, often at unprecedented levels.
But one country has remained an oasis of calm amid the storm. Over the course of 2011 Austria’s lawyers have seen very few lateral hires and no mergers or break-ups. The main national and regional players have continued plugging away, making the most of what opportunities they can find to get the billable hours.
Austria itself as an economy has, of course, not been immune to the problems affecting the Continent. The major ratings agencies reviewed Austria’s credit ratings in the first months of 2012. Standard & Poor’s cut the long-term credit rating from AAA to AA+ with a negative outlook, and maintained the country’s short-term rating at A-1+. Moody’s, meanwhile, kept its Aaa rating for Austria but changed the outlook to negative.
The main reasons given for the agencies’ negative outlook on Austria relates to the debt and risk involved in its banking sector, and particularly the relationship of Austrian financial institutions with the neighbouring Central and Eastern Europe (CEE) region, which is seen to be suffering more. Moody’s noted that latest figures from Austrian banking regulator the Financial Market Authority showed that total consolidated assets for Austria’s banks amounted to 390 per cent of the country’s GDP in the third quarter of last year.
Just as worryingly, Moody’s also pointed out that the banks’ exposure to the CEE and southern European region was “elevated” at e225bn (£188bn), or 75 per cent of GDP, in September 2011.
Standard & Poor’s shared Moody’s views, writing in the statement announcing the downgrade: “In our view, Austrian banks’ balance sheets could suffer from negative developments in major trading and outward direct investment partners (such as Italy and Hungary).”
The agencies said they were also worried by Austria’s low capitalisation levels in its banking sector and weakened government debt metrics. Public debt is expected to rise to 80 per cent of GDP next year.
Best friends and neighbours
Austria’s law firms are also heavily exposed to the fortunes of the CEE. The major Austrian firms employ one of two models for working in the region. Some, such as Wolf Theiss, Schoenherr, CHSH Cerha Hempel Spiegelfeld Hlawati and ENWC, have their own offices scattered across surrounding countries. Others, such as Binder Grösswang, Dorda Brugger, Fellner Wratzfeld & Partner and Lansky Ganzger & Partner, prefer to operate on a best-friends basis with local firms in the region.
The importance of the relationship between Austria and CEE cannot be underestimated. Several firms estimate that they gain around 50 per cent of turnover from outside Austria; some say the proportion of revenue coming from the region is more than half.
ENWC partner Georg Walderdorff, who heads the firm’s work in the region, says it had a solid year in several CEE countries last year, including the Czech Republic, Poland and Slovakia.
“We had one of the best years in our history in Hungary even though the general market is a catastrophe,” he says. “Sometimes if the economy’s going down there’s much more need for legal advice.”
Wolf Theiss managing partner Erik Steger is equally bullish about the region, revealing that there was more growth in turnover from outside Austria than from within the country last year. CEE work now represents approximately 40 per cent of the firm’s billings, and Steger expects this to rise.
“At times like this the client doesn’t really care about your nationality,” Steger points out.
He explains that, for example, Wolf Theiss’s energy practice head sits in Budapest, but would still lead work on a hydropower plant project in Bosnia. Local advice might be needed too, but the expertise would be sourced from Hungary.
However, those firms that have pursued the best-friends route are equally convinced of their model, and even think they have an advantage over their pan-regional rivals.
“We have the impression that there’s overlawyering by foreign law firms so there’s very fierce competition,” says Binder Grösswang managing partner Michael Kutschera.
He adds that the development of the market in the region means that it can now also boast strong home-grown firms staffed by local lawyers.
The firms with best-friends networks report a stronger flow of outbound work into the CEE region than inbound. Traffic is not all one-way - for example Fellner Wratzfeld partner Paul Luiki points to some recent work from the Czech Republic - but the trend is definitely east.
The middle ground
Most recent transactional activity in Austria and involving Austrian firms has been mid-sized M&A: ’strategic acquisitions’ dominate.
“The main M&A driver is mid-sized families and mid-sized enterprises that have a problem with the next generation or need to hand the business to the next in line,” explains Dorda Brugger Jordis managing partner Martin Brodey.
Brodey is comfortable with picking up instructions on small- and mid-sized transactions, pointing out that these can be quite profitable.
There were a handful of major transactions in Austria in 2011 and coming into 2012, most notably the acquisition of Orange Austria’s mobile phone assets by Hutchison and Telekom Austria, with the deals valued together at nearly e1.7bn. Firms that won instructions on the transaction included CHSH, Dorda Brugger and Schoenherr, as well as Allen & Overy and Freshfields Bruckhaus Deringer.
Schoenherr partner Robert Bachner feels the firm had a solid year in 2011 and says it managed to win itself roles on many of Austria’s biggest transactions on top of the Orange deal.
“There were big-ticket transactions that kept the firm busy in addition to general workloads that we were able to keep at very high utilisation,” he says.
Bachner adds that things slowed down a little at the start of 2012, with shorter pipelines across the board.
Walderdorff agrees, but notes that the type of legal work being done in relation to M&A makes up for a slower number of smaller deals.
“The transactional work is going to be more intensive than before. We see that clients really dig into the due diligence papers and so in that respect it’s more work. This subsidises a little bit the numbers of transactions,” Walderdorff explains.
Energy and related infrastructure work is one of the few areas of practice cited by all firms as being busy at present, both within Austria and across the wider region. Restructuring and compliance are also busy.
“On the restructuring front we’ve not seen any slowdown at all,” confirms Luiki.
Walderdorff says ENWC, in a prescient move, launched a restructuring and insolvency team in 2010 which went on to have a very good first year.
On the compliance front, revised capital markets legislation, which will force changes including stricter prospectus reviews, will provide “clear opportunities” for firms, says Lansky Ganzger corporate head Ronald Frankl.
“We have the impression that the majority of companies in Austria are still at the initial stage of implementing compliance measures and therefore there’s a huge need to catch up. We expect that numerous Austrian law firms will be mandated to advise on the implementation of compliance issues,” Frankl adds.
Austria is also observing the global trend of increased litigation. Lansky Ganzger’s litigation head Florian Horn thinks one reason for this is the fact that litigation funding is becoming more common in the country; while conditional fee arrangements remain prohibited, the market is getting used to the concept of third-party funding and the benefits it can provide.
The cloud on the horizon remains the potential for continued economic crises affecting Austria and the region. While the Austrian government has put austerity measures in place, intended to save over e25bn, the ratings agencies are doubtful as to whether this will really work.
“We’ve had lengthy discussions among politicians and the political parties as to how we should go about cost-cutting. What came from this is a not very convincing programme viewed from the angle of the ratings agencies,” says Brodey.
“So far what we can see is that our clients are very cautious,” observes Steger. “They simply don’t know whether the economy will be affected by the government debt crisis and if so to what extent. Very much will depend on whether we see another credit crunch. Economic forecasts suggest that this will be the case, however we all know that economic forecasting is difficult.”
Austrian firms, like many of their counterparts, are trying not to let the possibility of future problems dismay them too much. During the downturn several focused on strategy and setting themselves up for what might come, for example by investing in new training programmes for their lawyers or by diversifying practice areas.
“All of us in this field had to take austerity measures and what have you, and that’s now come to an end,” says Steger. “We and our competitors as well have used the time to strengthen our muscle for the time when we come out of this crisis,”.
But the general stability of the market, and the tendency for Austrian firms not to make any drastic changes to the way they work or their personnel, looks set to continue.
As Schoenherr’s Bachner concludes: “Times are challenging but the opportunities are there.”
Steady as she goes
Stability has been the watchword in Austria for some time, and will remain so. The surrounding region continues to be a major source of work for the country’s law firms, despite the potential for economic strife worrying the ratings agencies.
Annual inflation (February 2012)
Life expectancy at birth
Unemployment rate (September 2010)
Source: World Bank, Statistics Austria
Where to eat in Vienna
After 100 years Gmoakeller, a ’Beisl’ [informal Viennese restaurant], is still an insider’s tip, with outstanding local cuisine at moderate prices.
Huth Gastwirtschaft combines traditional dishes with seasonal delicacies, along with a selection of Austria’s best wines. With a charming garden on the edges of the Museumsquarter, Glacis Beisl offers modern Viennese cuisine in a relaxed atmosphere.
Erik Steger, Wolf Theiss
Le Salzgries is a charming French brasserie with great food. Family-run Italian Osteria Atri is very small and discreet and Cantinetta Antinori is friendly and pleasant. Le Loft has a spectacular view and great food, while Plachutta in Wollzeile is a classic top Austrian restaurant, and you cannot do better than Steirereck and its great location.
Michael Kutschera, Binder Grösswang