Difficulty securing financing has slowed corporate activity but Germany’s Mittelstand sector is helping firms buck the trend
In contrast to most other European countries, Germany has had a fairly solid few years, economically speaking. GDP has grown and it is the most powerful country in the EU on a political level.
But the jurisdiction is not immune from the problems its neighbours face. Completed M&A volumes and value were down in 2012 compared to the previous year and the value of 2012’s completed deals was only 38 per cent of that for 2007. This is despite the volume of completed deals being 59 per cent of the volume of 2007.
Lawyers in Germany, like those in other jurisdictions, report that corporate work began reasonably well last year before slowing down.
“Clients have become more cautious when it comes to investing and not necessarily because they don’t have funds,” says Oppenhoff & Partner corporate partner Stephan König. “Generally speaking, German companies do have quite strong balance sheets. It’s more a matter of getting to grips with what the economy’s doing over the next three to five years and whether something is the right area to invest in. Companies can take some time to make up their minds. If there’s doubt I think they’d rather not invest.”
At Hengeler Mueller, co-managing partner Daniela Favoccia thinks 2012 was a good year for the firm when it came to M&A, with 26 completed deals of good size. Examples she provides include the €4.46bn (£3.61bn) merger of Porsche with Volkswagen in July. Hengeler, together with Freshfields Bruckhaus Deringer, advised Porsche while Clifford Chance acted for VW.
“There’s money out there but it’s a bit more difficult to get financing for transactions,” acknowledges Favoccia. She adds that many deals that did succeed were “not straightforward boilerplate transactions”.
“More than ever, the focus is on the strategic rationale for a transaction,” says Favoccia, noting that several deals have involved proposing three possible solutions to a company’s strategic problems. “These days you prepare a spin-off, an M&A and an IPO, and one will fly.”
She says IPOs and equity capital markets have been particularly uncertain over the year, with several IPO postponements.
“Equity capital markets have always been volatile and this year has been extremely volatile,” she says.
König adds that in the corporate sector swift action has become more important than it used to be, especially in special situations or where distressed businesses are involved.
“Where companies or businesses become available you have to act a bit swifter to be a preferred bidder or even the ultimate buyer. There’s a certain need for speed,” he says.
At Beiten Burkhardt, business development head Felix Rackwitz thinks there are signs of a downturn.
“Generally we’re doing fine but we’re seeing the first downturn in the automotive industry and it’s a question of whether that’s going to affect the automotive supply industry. I think we’re facing a cooling-down period,” he says.
Heuking Kühn Lüer Wojtek managing partner Andreas Urban says 2012 has been a pretty good year, although things have slowed down compared to the growth the firm saw between 2008 and 2011.
“The peak was 2011, which was a good year – we had some very big matters,” says Urban. In 2012, by contrast, several deals fell through.
The key to German firms’ success in the past few years can be attributed to one key market segment, the Mittelstand – mid-cap companies, some with revenues over €1bn, which are the backbone of Germany’s industrial sector. Particularly for firms like Beiten Burkhardt, Heuking or Noerr, the Mittelstand’s health relative to the wider economy has proved vital.
“The Mittelstand is getting more important and not only for law firms but the whole German economy,” says Urban. “If you look at the German economy, a lot of the good news is coming from the Mittelstand companies. Normally they have a lean management, they’re very cost-sensitive and they did their job in 2008 well so they can reap the results.”
Favoccia says Hengeler is getting more work than it used to from the Mittelstand, especially as there is now increased interest from international investors into this sector.
“It’s natural that they’re looking for a law firm that can advise them on complex transactions,” she says.
Firms also say that their litigation and restructuring departments have been busy in 2012.
“We’ve not been known as a litigious country but companies are becoming less willing to compromise and are either trying to enforce their rights or give away something in a compromise or a settlement,” says König.
Away from workflows, Germany has remained a busy legal market in the past year. US, UK and local firms have all been busy recruiting – notably in Frankfurt – and a number of office launches took place in 2012 across the country.
In particular, he points to Allen & Overy’s hiring of Linklaters’ IP head Jens Matthes and Field Fisher Waterhouse’s German managing partner Joachim Feldges as being notable, adding that he is also intrigued by who firms such as Herbert Smith Freehills will hire for its announced German launches.
While Favoccia does not think the hires and openings are a precursor to merger activity, she does predict a “fight for talent” in Germany.
“I don’t foresee a wave of consolidation like elsewhere in the world because there’s still enough work for a variety of firms,” she adds.
At Beiten Burkhardt, Rackwitz believes the flood of new entrants will continue for another two years and could well be influenced by the continued internationalisation of the legal market.
“What will be interesting to see is how international mergers affect the German offices of these law firms,” he says. “This year and next will be interesting. There’ll be a few more firms coming, there are still some firms missing.”
Urban agrees, saying that Germany is “the centre of Europe” and is likely to attract firms that wish to have a base in a country that will have continued investment from the emerging markets in the East.
“If you want to be a full-service law firm, you have to be in every city,” Urban says. But he does not believe that the new entrants are a problem for the incumbents. “The German market can cope. We don’t think them a threat. [The newcomers] are not so powerful in Germany and it’s a long way from opening an office to being a leader.”
Even if the German economy dips a little, lawyers are confident there will still be enough work for old and new alike in the local legal market. Urban predicts that bank lending could pick up, and König agrees.
“I think we’ll see some significant activity this year in the area of capital markets,” he says. “How will companies finance themselves in the future? There’s a suggestion that equity but also debt capital markets, which have been quite calm, will also pick up in view of the reluctance of banks to lend.
“There’s a lot of lending packages that are coming to the end of their term which need to be refinanced or repackaged, and I think this will be an area where banks and companies will require legal assistance. I think that’s something that will be a focus this year,” he says.
Overall, German firms are fairly confident in their future, but like the rest of Europe much will depend on the future of the eurozone and the euro itself – and that is something that rests in the hands of the politicians.
Key figures: Germany
GDP (2011): $3.6tr
Inflation (Nov 2012): 1.9%
Population (2011) : 82m
Life expectancy at birth : 80
Unemployment rate (Q3 2012): 5.3%
Source: World Bank, Destatis