The German M&A market: bringing firms down to size

Biggest does not necessarily mean best in Germany, as Aled Griffiths discovers

Benchmarking the German deal market is a problem. The vast majority of deals done in Germany are private: transaction volumes are never made public, since it is not in the interests of Mittelstand owners to do so. Investment banks have only begun to penetrate the Mittelstand – the primary advisers on a deal are as likely to be lawyers or tax advisers as they are Harvard MBA graduates sitting in Frankfurt.

For this reason JuVe Rechtsmarkt, together with Frankfurt-based Finance-Magazine, recently undertook a survey of 500 leading corporates, private equity houses and banks in Germany in order to gauge their opinions of the service they were receiving from their law firms.

Clients were asked to nominate up to five firms and mark them on 13 different criteria, including partner availability, value for money, how risk-averse the lawyers were and international capability.

The responses were not all together surprising at first sight. The usual suspects led the field: the larger corporate practices such as Freshfields Bruckhaus Deringer, Hengeler Mueller, Clifford Chance Pünder and Linklaters Oppenhoff & Rädler were all frequently mentioned, with the first two receiving the highest marks. CMS Hasche Sigle surprised many by being the second most frequently nominated firm after Freshfields, which by any standards is a mark of the firm’s success over the past two years.

In one way, size does indeed matter. The important attribute of successful M&A practice groups is that they need to have gained market presence to be perceived as a player and to build up a track record in order for them to continue to attract future instructions.

But having more bodies to throw at a due diligence is not everything, as the results of the survey show. JuVe also published a size-adjusted ranking (above) reflecting the position of the firm once the number of partners (ie those who for the most part drive a transaction) is taken into account.

Thereafter things looked somewhat different. Of those firms traditionally ranked at the top of the market, Hengeler fared the best; and if it faces a challenge, the clients seem to think it does not lie where the firm’s competitors like to think. Many of the latter like to belittle Hengeler’s capability to act on international transactions, but the results of the survey prove otherwise.

The size-adjusted ranking for internation capability puts it third in the market – just before Freshfields. It performed outstandingly well in most size-adjusted rankings, with clients seeing it as leading the field for its proactive approach, industry knowledge and pragmatism.

Also, it soared above its competitors as regards pure legal skills. (The only firm to come close on this score was Munich’s private equity boutique Pöllath + Partner.) But clients were less happy on price. While it does not fare so badly as some of its competitors (notably Fresh-fields, which received truly awful marks for value for money), the same clients’ opinions on the transparency of billing practices was a more serious matter. Few had a positive word to say about it.

By comparison, the size-adjusted rankings were sobering reading for larger UK firms.

Freshfields did much better than Clifford Chance or Linklaters, but that was only relative. Instead, the surprise packages were (yet again) Shearman & Sterling, Gleiss Lutz and Baker & McKenzie.

If the survey was representative (and any market research on law firms ought to be topped-and-tailed with a long list of caveats), then it confirms that Shearman is the firm closest to challenging Hengeler and Freshfields at the top of the corporate market.

On size-adjusted ranking, Shearman led the field in international reach, transaction management, understanding of clients’ risks, industry knowledge and litigation-proof advice. It was second only to Hengeler as regards pure legal skills.

Just like its major rivals, however, clients seem to be less happy on value and billing practices. Overall, the survey demonstrates Shearman’s ability to gain key clients and keep them happy – just so long as they do not have to pay US rates.

There is still some way to go before these clients think Gleiss can seriously challenge the leading firms.

However, it fared better than many would expect on international reach, showing that the alliance with Herbert Smith and Stibbe seems to have been registered by clients.

But where Gleiss triumphs is in value for money and billing transparency. It came top of the size-adjusted rankings for both.

This does lead to difficult questions, however. It could be the case that Gleiss explains its billing practices (even if in the premium field) better than its competitors, and that clients appreciate this. On the other hand, some Gleiss partners have remarked on the need to be a little more ruthless in order to improve profitability.

Finally, Baker & McKenzie – which astounded many competitors with its strong profitability figures last year – repeated its strong performance in this M&A survey.

It ranks in the top four in all but one of the size-adjusted rankings and was judged to be second only to Shearman for international reach (no surprise there), but also for transaction management and risk-understanding. Only Hengeler received a better score for partner availability.

To prove that there is no prospect of a magic circle being formed in Germany, mid-sized firms (such as Pöllath or Stuttgart’s Thümmel Schütze & Partner) were nominated far more often than their size would suggest.

The lesson is clear: in the middle of a downturn, the German M&A market is up for grabs – not least because not everybody is making their clients blissfully happy.

Aled Griffiths is the editor of JuVe Rechtsmarkt