In simple terms, the world consists of three principal financial elements: the US, Europe and Asia. But looking at the strategies of some firms recently, you would be forgiven for thinking there were only two. While everyone in London is running around seeking out European mergers in a bid to win the eye of a US suitor, poor old Asia seems to have been forgotten.
No one knows more about this than Freshfields Bruckhaus Deringer's Asia managing partner Ruth Markland, who has witnessed her firm go through not just one, but two German mergers. “The activity has been in Europe, and quite rightly so,” she says. “But needless to say, the Bruckhaus merger has absorbed an enormous amount of management time. The joint venture [with Drew & Napier], for example, could not have come at a worse time vis-à-vis Bruckhaus.”
So what exactly was happening in Asia while the rest of the world was whipping itself into a frenzy over Europe? Well, quite a lot actually. The infamous crash of the mid-1990s is becoming more of a memory than hard reality. In fact, particularly in China and South Asia, lawyers are gobbling up a feast of restructuring work.
Coupled with the sophisticated and strengthening markets of Tokyo, Hong Kong and to some extent Singapore, there is also a raft of emerging markets. Malaysia, Indonesia and Vietnam are seeing project finance and restructuring work and tentative foreign investment all gaining ground. Korea, too, is being watched with interest. “There's a lot of deal activity in Korea,” says Markland. “We have to look carefully at what sort of presence we want to have, and that partly depends on how the regulations are going to pan out.”
The older, more established markets, meanwhile, are concentrating on domestic and international M&A and securities. Clifford Chance is widening its securities practice to include Singapore and eventually Tokyo (The Lawyer, 18 December) and fellow banking giant Allen & Overy (A&O) recently hired securitisation specialist Ken Abound from Orrick Herrington & Sutcliffe (The Lawyer, 13 November).
A&O Singapore managing partner Chris Rushton says it is going to be a growth area for the firm. “Ken is letting his existing clients know that we have resources, size and domestic capabilities in a number of countries. These people will follow him across,” he confidently asserts.
The other big thing for the Asian market, puns aside, is China. Due to succeed to the World Trade Organisation this year, firms are poised to take advantage of a surge in work. Already there has been some mammoth deals announced: AT&T's joint venture with Shanghai Telecom and Shanghai Information Investment, China Telecom's planned initial public offering (IPO) and the Nam Yue restructuring (see deals column, page 33). All this with the restrictions of f oreign trade still in place.
But where exactly does this leave Hong Kong? The region has had its own set of problems to deal with lately, quite aside from China insisting on taking a role on the international stage.
One of its biggest challenges, and one that has hit domestic firms hard, was the property crash of 1997. Property was big business on this tiny island. The slump, coupled with the abolition of scale fees, sent shock waves through the domestic legal community.
Deacons managing partner Mark Roberts says: “The only good news about property is that we weren't over-reliant on it. A large amount of firms, particularly small ones and sole practitioners, were. Some have had to retool and some have gone out of business altogether.”
But it is not just the small firms that suffered. It is understood that Johnson Stokes & Master, one of Hong Kong's oldest firms, is currently refocusing away from property into other areas. The emphasis is now on technology, media and telecommunications (TMT), for which the firm recently set up a dedicated group, and on bolstering investment work following the introduction last year of mandatory pension schemes. Long-term client HSBC gave it a foot in the door and it is also acting for two other major fund providers – Fidelity and AIA Jardine Flemming.
While international firms may not have pegged their success on property (and frankly, any that did deserved all they got), they too are suffering from the property slump.
With a number of domestic firms either going under or teetering on the brink, members of the Law Society of Hong Kong were concerned that not only were foreign firms coming in and taking their work, they were also able to cream off the best recruits.
The Law Society of Hong Kong has consequently made getting onto the Hong Kong equivalent of the legal practice course extremely hard. Linklaters & Alliance's Asia managing partner Andrew Roberts says this makes an already tight recruitment market even tighter. “It's tougher than it is in the UK because the pool from which you can draw is much smaller,” he says. “And although there are plenty of people coming out of law school, the people we're looking for need to be ideally trilingual and at least bilingual.” In other words, the majority of candidates coming out of Hong Kong University are not of the requisite quality for an international magic circle law firm.
There is another more serious problem facing newlyqualified lawyers. All foreign lawyers must sit the Law Society exams if they wish to practise in Hong Kong. The first problem is that they are incredibly difficult (firms have to give those sitting the exams considerable time off). They are held once a year and, if you fail, tough. There are no resits – you just have to wait for the following year's exam.
But the most bizarre aspect of the whole procedure is what is included in the exam. The property slump may have hit, but you still have to cover conveyancing, regardless of length of experience or whether your firm even offers the service. Only with five years post-qualification experience are you able to negotiate which parts of the exam you can skip, but don't even think of trying to get out of conveyancing.
Simmons & Simmons corporate partner Paul Li says: “Law training is something people are worried about. It has now become extremely difficult to hire overseas lawyers. There was only a 25 per cent pass rate last year.”
He relates the story of an eight year-qualified Australian lawyer who recently joined Simmons' Hong Kong office. Despite all his years of experience and his corporate practice area, he will still have to sit the conveyancing paper when taking the qualification papers later this year.
But despite all of this, Hong Kong is still an important centre entering a new era in its history, although tangible evidence of Chinese control is still hard to come by. The only real difference is that meetings tend to be held in either Cantonese or Mandarin instead of defaulting to English. The gweilo (“white ghosts”) may have to learn new skills (or recruit bilingual lawyers at the very least), but it is not exactly the Red Army marching in to steal the capitalists' toys. “That is a reality of life. The fact you are a gweilo does not count for anything, but these things were happening here anyway,” argues Herbert Smith's Asia managing partner David Willis.
Indeed, the things that make Hong Kong an attractive business centre are still there. Willis explains: “There's no competition law here. If a large man comes along and gobbles up a smaller competitor, he will be allowed to do that. Tax is also not such an issue – there is no capital gains tax and the income and profits taxes are low.”
Yet Asia is considerably more than just the sum of Hong Kong and China. Singapore has also had a highly significant 18 months, particularly for international law firms.
The area is a major port and, unsurprisingly, shipping experts Watson Farley & Williams, Ince & Co and Holman Fenwick & Willan all have operations there. The authorities, though, have realised that they need to offer more if they are to reap the benefits of a global business community. The country has therefore worked on becoming more overseas-friendly. The most significant move was, of course, the introduction of joint venture licences aimed at enabling non-domestic firms to practise local law for the first time.
There is, therefore, a shift taking place in the international firms' priorities regarding Singapore. It was traditionally used as a base to capture South Asian work from Malaysia, Indonesia and the like, as they were unable to provide domestic advice for either international or local companies. Now that this situation has changed, the scope of work available to international firms is set to increase significantly.
TMT, for example, is continuing down its own world domination path, and people are falling over themselves to get a piece of this particular pie. Mobile telephony is particularly big in Asia – vast mountainous expanses of often sparsely populated land are far more suited to mobile technology than fixed-line networks.
But what we are witnessing in Asia is only the beginning. Despite the varieties of work and the opening up of countries previously thought destined to remain impervious to the outside world – China, Korea and Indonesia to name but three – this is all just the labour pangs of a rebirth, albeit of a strong, stable economy. Because for every Tokyo – one of the most sophisticated markets in the world – there are a dozen smaller countries whose greatest claim to fame is still restructuring. How the region will continue to grow and develop over the next few years is anyone's educated guess, but those who neglect it do so at their own peril.
Roberts at Linklaters, who knows a thing or two about German mergers, says: “Europe is important, but as I say to my colleagues back in London, do not underestimate the need to continue improving Asia. If you have the leading product in Asia and the leading product in Europe, then you are covering over 55 per cent of the world's gross domestic product.” Quite. n