New entrants plus a mix of up and downsizing equals an active legal market in Europe’s strongest jurisdiction
It has been a busy first six months in the German legal market. Deal volume is up significantly on the same period last year, although value is down. And the legal market itself has also seen a bit of a shake-up. Herbert Smith Freehills (HSF) has made good on its promise to launch in the jurisdiction, hiring three partners to date in preparation for a Frankfurt opening in August.
Latham & Watkins and Oppenhoff & Partner have also been extending their Germany teams, the US firm picking up troops from Shearman & Sterling to open in Düsseldorf, and Oppenhoff recruiting and relocating partners to set up in Frankfurt. Simmons & Simmons also expanded, opening in Munich in March.
Meanwhile, a steady stream of departures led Shearman to downsize in Germany, closing Düsseldorf and Munich and centralising its German operations in Frankfurt.
The activity comes on the back of a solid 2012 and start to 2013. Of all European jurisdictions, Germany’s law firms posted the strongest set of financials for the calendar year, with most firms seeing substantial revenue growth.
Oddly, this does not seem to have translated so well for some international firms in Germany. Clifford Chance announced a 4.5 per cent drop in turnover between 2011/12 and 2012/13, to €189m (£163m) – a figure that is still higher than that posted in 2009/10 and which still makes the magic circle firm bigger than all German independents save Hengeler Mueller.
Despite this, UK-headquartered firms showed their confidence in Germany with this year’s partner promotions. A total of 47 German lawyers were made up to partner by the top 20 UK firms this year, a rise of six compared with 2012. Norton Rose, which increased its German promotions by four to five, and Taylor Wessing, which more than doubled its German promotions this year, were the standouts.
German independents say they have seen a strong start to 2013.
“The market is better than last year,” reports Gleiss Lutz managing partner Rainer Loges. “The first six months have been encouraging.”
Hengeler Mueller co-managing partner Daniela Favoccia agrees.
“The first three months were a bit on the quiet side but now, with six months completed, it’s excellent,” she says.
The market is characterised by a strong mixture of work. Noerr co-managing partner Alexander Ritvay points to practice areas such as real estate, tax, compliance and regulation as performing well, while Favoccia adds that real estate is doing well, along with M&A, private equity and litigation.
“Corporate Germany is more litigious these days,” Favoccia says. “We have more post-M&A litigation, and litigation in the context of board liability – these are all sensitive, success-critical areas.”
She also points to capital markets as being fairly active, if uncertain. Several IPOs have been proposed and then cancelled, such as the listing of real estate company Deutsche Annington. The Terra Firm-owned company cancelled its €1.1bn IPO in early July, citing “adverse market conditions”, before a reduced IPO happened a week or so later.
Forklift truck maker Kion successfully listed, with trading on the Deutsche Börse getting under way on 28 June after an IPO worth almost €1bn, as did real estate company LEG in January, raising €1.3bn. Meanwhile, Commerzbank has managed a capital-raising and broadcaster RTL did a secondary IPO in April.
“That’s a lot for the German market,” adds Favoccia.
She notes that in the M&A and private equity market some transactions are being prepared with a ‘dual-track’ scenario, with an IPO also proposed to reduce clients’ risk.
M&A activity, while slowish on the volume side, is visibly picking up according to lawyers.
“There’s more interest on the side of foreign investors,” says Loges. “US clients are beginning to be more active than they have been in the past few years, particularly for inbound investment.”
Noerr’s Ritvay says globalisation is manifesting itself at all levels of the German economy.
“Even a small company in Saxony is now totally global,” he says.
His co-managing partner, Tobias Bürgers, adds: “We have a lot of new clients coming from India, China, the US and South America. The atmosphere is quite attractive.”
The world game
The internationalisation scenario is very much what is behind law firms’ expansion in Germany. For local firm Oppenhoff, the need to move into Frankfurt was driven by clients.
“A firm like Oppenhoff has a number of international clients,” points out Oliver Kessler, who joined the firm from Sidley Austin in October 2012 to spearhead its expansion into Frankfurt. “Oppenhoff has a number of referral firms all around the world; all had some interest in Frankfurt as well. Particularly for the US, Cologne is a bit off the beaten track.”
Frankfurt was chosen over other cities like Hamburg or Munich due to its status as a financial centre.
“For a firm with a client base that’s 50 per cent-plus international it really had to be Frankfurt,” adds Kessler. “The larger middle-market companies in the market are having trouble with their financing and capital markets products. That’s our playing field. We know our way around the financing community.”
He says Oppenhoff is planning to expand its services to its existing clients as well as seek a wider client base through being in Frankfurt.
And Frankfurt is also the launchpad for HSF, although the firm has already announced plans to extend its German offering to Berlin too.
Ralf Thaeter, who has joined HSF from former alliance partner Gleiss Lutz to lead the firm’s entry into Germany, says the firm is aiming to build up three pillars in Germany – corporate and advisory, finance, and disputes.
Frankfurt will be the base mainly for finance and for Berlin more corporate and regulated industries, although the launch team of Thaeter, ex-Norton Rose partner Nico Abel and SJ Berwin German real estate head Hans Kessler are primarily transactional and will be based in Frankfurt.
“If you want to build up a finance practice then that’s Frankfurt,” notes Thaeter.
HSF corporate head Patrick Mitchell backs up the international picture painted by the German firms.
“There were quite fundamental economic and fiscal drivers behind the global shift” he says. “The need to be in jurisdictions to secure instructions and execute them is crucial. Something like 75 per cent of our major clients have some sort of operation in Germany. There’s increasing interest in M&A deals by Japanese and Chinese buyers.”
Mitchell says the firm is aiming to be “credible” within three years, meaning he wants HSF to be acting for existing clients on German transactions as well as winning new clients in the country.
The firm had planned the launch since it broke off its alliance with Gleiss and Benelux firm Stibbe at the end of 2011 after the two European firms decided not to take up legacy Herbert Smith’s offer of a merger. Mitchell explains Herbert Smith had agreed not to launch in Germany until 2013, and while it had hoped to find a merger partner, was making the best of the greenfield approach instead.
“The greenfield approach gave us the chance to build a team of people who are not only of high quality but who also fit well in terms of our culture and mindset,” Mitchell says.
Observers in the market are less convinced by this approach, pointing to the diversity of the team appointed so far and questioning whether HSF will be able to build a united front as a result. Past entrants into Germany have largely succeeded because they have found a firm to merge with, or at least a team of several partners. German managing partner Thomas Fox says Düsseldorf’s industrial base was the draw for Latham, adding that Germany has contributed a “considerable share” of turnover to the firm .
Latham’s entry into Germany came through a team acquisition from Ashurst, and the US firm is moving into Düsseldorf through another team acquisition, this time from Shearman.
The firm’s focus is very much on corporate work, with the Shearman team all known for advising large and mid-sized German companies on their M&A and other matters.
But the entrants into the German market have not got everyone talking – at the moment, the most keenly-observed moves are that of Shearman. The US firm lost a series of partners, mainly to other Anglo-Saxon outfits, over the course of 2012 and the start of 2013.
Then in April, on the same day Allen & Overy announced it was hiring Düsseldorf corporate partner Hans Diekmann, Shearman said it had told partners the previous weekend that it was closing both Düsseldorf and Munich.
The firm’s European managing partner Nick Buckworth told The Lawyer at the time that the firm was building a “new Shearman & Sterling in Germany, with elite but smaller teams which will allow us to execute on high-end cross-border transactions in Europe.”
Around two-thirds of Shearman’s German lawyers were expected to leave as a result of the restructuring. M&A partner Thomas König and tax partner Bodo Bender are the new German managing partner and deputy managing partner, and M&A partners Georg Thoma and Alfred Kossmann and finance partner Winfried Carli are relocating to Frankfurt from Düsseldorf. Thoma in particular is highly regarded in the German market.
Sadly, neither Buckworth nor König were able to be interviewed for this piece.
Others in the German market believe similar moves by other international firms are possible, stressing the need to demonstrate to clients that you are committed to the market.
“If you’re here in Germany, it’s important that you focus on Germany as a country and don’t lead it from the US,” says Favoccia. “There’s activity and there are opportunities, but if you want to be here you have to be here for real and focused. The fruit isn’t hanging that low.”
Oppenhoff’s Kessler says growth will be tricky for those international firms that maintain only a minimal presence in Germany.
“It’s hard to attract good people for these small operations that are there to fulfil some strategic need dictated from elsewhere,” he says.
The sheer number of firms in Germany is beginning to concern some lawyers.
“The number of firms competing at the top of the market in the broader sense is high,” Loges comments.
This, he says, is particularly apparent when Germany is compared to other European countries, where a few large local firms and a handful of large international firms are the only real players at the top end.
However, others think that consolidation in Germany would be contrary to what the users of legal services want.
“Consolidation would mean larger firms, but if you talk to some of the clients you have the impression there’s a completely different trend,” says Favoccia. “They prefer boutique-style lawyers. They’re saying ‘If I have a particular problem in a particular area I’d rather have a small and effective group of lawyers and advisers’.”
Ritvay points out that any new entrants are merely “changing the nameplate” on the door, as they are picking up incumbent lawyers. He thinks firms such as Noerr have to be more and more innovative to attract the work.
“It’s clear that the market is changing and we need to come up with ways to solidify the business,” Ritvay adds.
The Asian equation
A key theme for the coming years is certainly Asia, and the investment coming from Chinese companies into Germany. This is where HSF, which, thanks to the addition of Freehills last autumn, has a strong Asia Pacific presence, believes it can benefit.
“Germany will come out of the euro crisis as a strong economy compared with others in Europe,” predicts Thaeter. “There will be a lot of outbound investment from Germany and we hope to generate our share of that. Inbound investment will be dominated by Asian investors.”
Generally, Germans are optimistic about the remainder of the year. Elections in September are unlikely to cause any great upheaval, with the re-election of chancellor Angela Merkel expected by most.
“I don’t think there’ll be a major upturn in the legal market, but I’m reasonably optimistic that it will continue to be a bit better than last year – I don’t think we’re facing another boom,” says Loges.
“We’re always cautiously optimistic, but I’m never bullish,” adds Favoccia. “If you look at the pipeline it’s good – this will definitely be an okay year. It could be a very good year if things continue to develop as they’ve started.”
Key figures: Germany
Population (2011): 80.4m
Inflation (2012): 2%
Life expectancy at birth: 81
Unemployment (May 2013): 5.3%
Source: World Bank, Destatis