Breaking through German lines

Are US firms in Germany too cautious for their own good? Vanessa Pawsey asks whether their strategies are paying off

According to rumblings along the banks of the Main, the German economy is picking up. It is still too early to say for sure, but an air of optimism is definitely creeping back into the market.
Befittingly, Dewey Ballantine's recent recent raid on Weil Gotshal & Manges prior to opening an office in Frankfurt confirms that Germany is still a vital market for all law firms serious about Europe. Despite speculation to the contrary, US firms have so far weathered the economic downturn and have shown no signs of backing off. But the entry of another player provides new evidence that the trend is continuing.
“Our goal is to take what we do best in the US and transfer it to Europe,” says US partner Morton Pierce, reaffirming the strategy typical of so many US firms.
Pierce believes the timing is perfect: the climate in Germany has caused German lawyers to re-evaluate their position. “Either they're not yet affiliated with a large international firm and are wondering whether they should be, or they're evaluating whether the affiliation is the right one,” he said. Both positions provide a positive environment for recruitment.
Dewey already has offices in London and Warsaw, and satellite offices in Budapest and Prague, where it offers clients project finance, capital markets and M&A capability. Now, with the recruitment of corporate partner Geza Toth from the London office of Weil Gotshal & Manges, the plan is to service its UK financial institution clients in Germany.
Pierce, though, is adamant that the firm is in it for the long-term and is committed to the gradual process of growing an office organically. He is also aware of the potential pitfalls which arise from the unrealistic expectation that firms entering Germany will make instant money.
Profitability remains far more important for US firms than for UK firms and this has led to the development of two distinct strategies. With the exception of White & Case and Baker & McKenzie, US firms in Germany have targeted high-end work to the detriment of bulk.
Most US firms in Ger-many fall into two categories: those there to service US clients investing in Germany, and those that are looking to advise international clients on complex, cross-border transactions.
The most profitable New York firms tend to fall into the first group. Last year the race was on as Debevoise & Plimpton, Simpson Thacher & Bartlett, Skadden Arps Slate Meagher & Flom and Sullivan & Cromwell all searched for a German-qualified partner.
Finally, in April, Skadden pipped the others to the post by hiring leading private equity partner Richard Sterzinger from Lovells' Frankfurt office. In May, Debevoise hired corporate partner Thomas Schurrle from Nörr Stiefenhofer Lutz, and Friedrich Hey from the New York office of Oppenhoff & Rädler Linklaters & Alliance (now Linklaters Oppenhoff & Rädler) to set up an office in Frankfurt. Then, in October, Sullivan succeeded in prising the Goldman Sachs relationship partner Wolfgang Feuring from the Frankfurt office of Freshfields Bruckhaus Deringer, and Konstantin Technau from Nörr.
Simpson Thacher, on the other hand, has pulled back and now hovers on the fringes, deliberating its next move. Its reticence to enter the market is understandable given the difficulties its rivals are encountering.
While the long-term importance of the German market is agreed, going for high-end private equity and M&A work is a risk. There is no doubt that both Sullivan and Skadden have hugely profitable offices, but their visibility in the market is scarce. Sullivan followed Goldman to Germany and although it has been successful in luring Feuring from the clutches of Freshfields, a question mark hangs over the extent to which the New York relationship will be extended to Frankfurt. Goldman already has strong relationships in Germany with Freshfields, Hengeler Mue-ller, Shearman & Sterling and Milbank Tweed Hadley & McCloy.
Kirkland & Ellis, which has in the past rejected the possibility of opening in Germany, has suffered for its decision. When its longstanding client private equity house Bain Capital moved into Germany, Bain formed a joint venture with Aventis – the new partnership was advised by Kirkland in London and Joerg Kirchner at Baker & McKenzie (now at Ashurst Morris Crisp) in Germany. However, in more recent deals Bain has used Ashursts and when Kirchner was conflicted, it instructed Freshfields.
Kirchner says Bain is clearly looking for a firm with a substantial workforce in Germany. Kirkland's London office continues to advise Bain but, according to London partner Jim Learner, it will open an office in Germany when the time is right.
“Our position is that we're considering the possibility but we can't give a timeframe,” he says.
Editor of the German publication Juve, Aled Griffiths, notes that poaching a client from a top US firm is no mean feat and not something to be ignored. “The German market was surprised that firms like Baker & McKenzie managed to poach private equity clients away from the big US firms,” he said.
However, Milbank is testament to the fact that running Germany out of London can work because, despite having no German-qualified partners, it was involved in two of Germany's biggest buyouts last year. It advised Goldman Sachs Private Equity on Messer Griesheim and Permira, and Goldman Sachs Capital Partners on Cognis.
Following a different model are firms such as Shearman and Cleary which have a more advanced presence in Europe and which target German clients. Shearman is probably the most successful US firm in Germany to date. It opened in Düsseldorf 12 years ago to do privatisation and has always focused on big-ticket international clients. Four years ago, when Daimler-Benz merged with Chrysler, Shearmans landed the role advising Daimler. Chrysler instructed Bruckhaus Westrick Heller Löber, but Daimler-Chrysler continues to use Shearmans.
Daimler-Chrysler, which was the first US-European merger, underlined Shearman's growing market penetration. Shearman is also one of a handful of firms instructed by Allianz and the relationship is strengthening on the back of corporate rainmaker Georg Thoma's relationship with Allianz chief financial officer Paul Achleitner, which dates back to the latter's days as head of Goldmans' Frankfurt office.
Cleary, which opened in Germany in 1991, has been less successful but nevertheless has a stronghold advising the banks in the capital markets arena. Other firms criticise its reluctance to hire laterally at partner level, which they claim has stunted its growth. Then, last November, it lost Gottfried Breuninger, one of the most prominent international tax lawyers in Germany, and his team to Shearmans.
The recent entrants into the market looking to pick up European clients have either poached high-profile teams or taken over entire offices. Latham & Watkins and Mayer Brown Rowe & Maw merged with the Hamburg and Frankfurt offices respectively of the now defunct German firm Gaedertz. Weil Gotshal, Willkie Farr & Gallagher, McDermott Will & Emery, Hogan & Hartson, Gibson Dunn & Crutcher and Brobeck Hale and Dorr have all poached teams or cherry-picked individual partners.
Mayer Brown's managing partner in Cologne, Werner Hein, says the best way for a US firm to make progress in Germany is to take over an office. “The office we bought fitted well with our core areas, mainly corporate, which meant we didn't have to do the usual shredding process. I think if you want to be active in Germany in a major way, this is the fastest way to do it.”
Weil Gotshal German head Gerhard Schmidt would disagree. Last year, the firm took Schmidt, a high-profile private equity rainmaker at Beiten Burk-hardt Mittl & Wegener (now KPMG Beiten Burkhardt), to open its office. He has propelled the firm headlong into the market and a list of recent transactions includes advising Lehman Brothers as creditor in the restructuring of Kirch Group, and advising Texas Instruments in the listed takeover bid by Condat. However, the joint lead partner on the Texas deal, Toth, who was based in London, last month joined Dewey.
But despite Toth's departure, Schmidt is certain that Weil Gotshal has got its strategy right. “Up until now the biggest success in Germany is Shearman. But we're more focused and have a stronger tax capability. And because we're smaller, we don't need to move away from transactional work. We can afford to take this transactional approach although it's more risky because it relies on assignments that we have to pitch for,” he says.
One partner in a rival firm acknowledges Weil Gotshal's success, but questions how long it will be able to sustain such a high profile without substantial investment and growth.
The only two US firms to have merged with German firms are White & Case, which merged with Feddersen Laule Ewerwahn Scherz-berg Finkelnburg Clemm to become White & Case Feddersen, and Coudert Brothers, which merged with Schürmann & Partners to become Coudert Schürmann. White & Case is one of the only US firms with a true international presence, but it has had a number of problems in Germany. Feddersen was an established medium-sized firm, but it was not an international corporate practice, and White & Case Feddersen is trying to build its global practice.
In March it dropped four domestic lawyers from its Berlin partnership. And in May 2001, it lost a high-profile three-partner team led by Cornelius Fischer-Zernin to Allen & Overy, where they launched its Hamburg office.
In contrast with US firms, UK firms have a larger presence and more have opted for mergers. Freshfields Frankfurt-based M&A partner Burkhard Bastuck believes the long-term strategy for Anglo-Saxon firms in any mature market must include a legitimate practice in the core areas of corporate and finance.
Germany is a difficult market for US firms. Chargeout rates are low compared with the rest of Europe and there is a high ratio of partners to associates. This means Germany is not naturally a profitable market. According to Maurice Allen, head of banking in London and member of the European management board at White & Case, this means a lot of US firms have found Germany less attractive than they first thought. He says long-term success is dependent on competing internationally.
Whether or not the German market is saturated will remain unclear until the economy recovers. Some believe there is always room for quality practices, while others say some firms may have to revert to a representative office. For now, the debate remains open.