The Turkish market’s resilience in these tough times is attracting a host of international players looking for local suitors
In 11 years’ time the Republic of Turkey turns 100. And by 2023, if the country’s government has its way, Turkey will be the world’s 10th-largest economy.
The strategy is ambitious. To achieve it, it is estimated that the economy will need to grow by a minimum of 8 per cent per year. In 2011 the forecast is for growth of just under that – an impressive result given the economic climate globally.
But while growth is strong and the mood in Turkey is positive, there are a few clouds on the horizon. The Turkish lira has recently depreciated against the US dollar. Where $1 was worth just over 1.5 lira in January 2011, it is now worth 1.8 lira. Inflation is high compared with most other countries’ inflation rates, hitting 10.5 per cent in December 2011. Nor can the effects of the downturn in the rest of the world on Turkey be forgotten.
Get in there
Despite these dark spots, Turkey has in the past couple of years become a country of significant interest to international law firms. 2011 alone saw the arrival of Allen & Overy (A&O), Baker & McKenzie, Clifford Chance and Chadbourne & Parke, along with Germany’s Graf von Westphalen. In January McDermott Will & Emery formed an alliance with Istanbul firm Fora & Sanli, making its entry to focus on healthcare.
“There’s a lot of work here,” notes Yesim Bezen, a partner at local firm Bezen & Partners.
She sees the influx of foreign firms as a relatively new phenomenon.
“It was merely White & Case, Dentons [Denton Wilde Sapte, now SNR Denton] and Gide [Loyrette Nouel] for many, many years,” says Bezen. “Nobody was concentrating on this country because they were able to render advice from abroad and they’re still able to do that. What’s changed is that more of their clients are moving into this country and setting up.”
Ismail Esin, managing partner at Baker & McKenzie’s Turkish associated firm Esin Attorney Partnership (EAP), agrees.
“There are a lot of multinationals in Turkey and a lot of subsidiaries of Turkish companies abroad as well,” he says. “Today, many of our Turkish clients are looking for international legal services in other countries, but not in Turkey.”
Clifford Chance Istanbul managing partner Simon Williams also credits the firm’s clients as being the catalyst to open on the ground.
“We’ve been doing significant work in Turkey for a number of years, mainly around infrastructure, energy and acquisition finance,” Williams says. “International clients decided that it would make sense for us to have an operation here.”
Turkey’s bar regulations are complicated in comparison with those of many jurisdictions. It is possible to have an office in Istanbul and not practise Turkish law, as A&O has chosen to do, but those wishing to offer Turkish law capabilities to their clients must team up with local firms.
In Clifford Chance’s case, the route chosen was to persuade partner Mete Yegin to leave respected local firm Pekin & Pekin. Yegin joined Clifford Chance as a consultant in 2009 and set up Yegin Legal Consultancy, which has become the magic circle firm’s local affiliated partner.
The more common route to an alliance is to find an existing local firm willing to team up. That was the choice made by Baker & McKenzie, which found a keen partner in EAP, one of Turkey’s largest firms.
Esin says Baker & McKenzie was the “best fit” for his firm, speaking enthusiastically about the US firm’s culture and people.
“I really like them. We’re happy to be part of Baker & McKenzie,” he asserts, two months into the deal.
He adds that Baker & McKenzie’s Verein structure, by which not all of its offices are integrated financially into the firmwide profit pool, means there is no practical difference between Turkey and other international offices, despite the technicalities of the alliance.
However, not every independent firm in Turkey wants to join up with an international player. Pekin & Pekin managing partner Fethi Pekin observes that both DLA Piper’s alliance with Yüksel Karkın Küçük (YKK) and the EAP-Baker & McKenzie deal are significant moves that appear to be going well, but he says Pekin & Pekin is not tempted to follow suit.
“We’re happy with our position of being a leading independent, full-service law firm,” he insists. “If the forecasts of the economists come true, the pie will grow.”
Erim Bener, managing partner at Bener Law Office (BLO), reveals that his firm has received approaches from international firms and has not ruled out an alliance, although he says it would depend on the firm involved.
Bezen & Partners is in a similar position.
“As a partnership, we’ve said we’re open to offers – it depends on the terms and conditions of those offers,” says Bezen. “We believe in synergies and in what we’ve achieved these past years.”
Umit Hergüner, managing partner at Hergüner Bilgen Özeke Attorney Partnership, says there would need to be a compelling reason for his firm to give up its referral relationships. Hergüner estimates that the firm works with around 35 other independent firms internationally, and that giving up working with 34 of those would “have to be justified in numeric terms”.
All the independent firms expect more approaches from the international players that are not yet present in Turkey. Jonathan Blythe, an external consultant with Senguler & Senguler Law Office, says the firm has been visited by a number of suitors since the economic crisis hit.
“They’ve seen that this is a big market, it’s an undeveloped market and there’s still room for players to come in,” explains Blythe. “Certainly, when you compare Turkey with some of the East European countries they all went into earlier, they’re looking at much better prospects.”
The prospect of increased competition is welcomed by incumbents.
“It’s going to be incredibly interesting to see which of the top four or five firms surrenders its independence, or decides to become the Slaughter and May of Turkey,” says Charles Dunn, managing partner at Kinstellar’s Istanbul office. “They have a strategic choice to make and if they surrender to international firms we’ll say, ’that’s good news for us’.”
Bridging the Gulf
The main cause for optimism among those already present in Turkey is the country’s diversifying growth prospects. Although much of the economy remains reliant on EU and US trading partners, increasingly investment and trade is coming from, and going to, other regions.
A key source of new capital is the Gulf, with all firms reporting work from the Middle East in the past year. The Arab Spring could be another catalyst, some believe.
Blythe says this growth is due in part to the changing political environment in the region, particularly the toughening of Turkey’s stance on Israel by Turkey’s prime minister Recep Tayyip Erdogan.
“There used to be a bit of a suspicious sort of relationship between the Arab countries and Turkey,” explains Blythe. “Turkey used to be the colonial master for the region – the Ottoman empire controlled most of these countries. Turkey has a different political structure and is seen as being more secular and less Islamic. It has a unique relationship with Israel.”
But he thinks that recent tension between Turkey and Israel over the Gaza Strip has softened the approach of the Gulf region towards Turkey. Turkish representatives have also visited the Gulf to promote their country. This has paid off, with firms reporting a number of transactions associated with the Middle East in 2011, with more expected.
“We’d expect the interest coming from the Middle East, and even the Far East, to increase in 2012,” asserts Williams. “We’ve got a number of transactions from Middle Eastern and Asian clients who’ve bought businesses or stakes in businesses in Turkey.”
Another country strengthening its ties with Turkey is Russia, largely through the conduit of energy. Just before the New Year the Turkish government gave the go-ahead for the construction of the Gazprom-bankrolled South Stream gas pipeline that will run under the Black Sea to transport Russian natural gas from Russia westwards into Europe.
Meanwhile, a consortium led by Russian company Rosatom won the tender to build Turkey’s first nuclear power plant in 2010. Despite the impact of the meltdown at the Fukushima plant in Japan last year, the project is reportedly going ahead.
Both projects are heavily political. The South Stream pipeline has a potential conflict with a separate gas project, the EU- and US-backed Nabucco pipeline, which will take gas from Turkey to Austria.
The South Stream project and recently negotiated price reductions for gas supplied through an existing pipeline from Russia, believes BLO partner Onur Kordel, show that Turkey is still dependent on Russia for its gas supply.
But the project is indicative of a continuing wave of work in infrastructure and energy. There are also a number of PPP deals ongoing related to the healthcare sector, which is proving to be one of the draws for McDermott’s move into the country.
The continuing growth in work and interest from international investors will help drive the development of the legal sector.
“The Turkish legal market’s still developing rapidly,” says YKK co-managing partner Cüneyt Yüksel. “Compared with 10 years ago there’s a significant improvement. You can feel this. There’s a need for legal support in Turkey because the economy is booming and developing,”
However, Turks are notoriously bad at managing to remain in partnership with each other, and spin-offs from small independent firms are common. This, say lawyers, has led to severe price pressure in the market.
“The thing that’s always crucifying in the Turkish legal market is that everyone’s massively competitive on legal fees,” says Kinstellar’s Dunn. “These firms can only do one thing – they can only ever compete on price.”
He thinks the price pressure is confined largely to domestic clients, as international clients are used to international rates and prepared to pay them.
“It’s not a problem with clients who look for quality,” Hergüner says. “Clients are able to distinguish [between] experience and inexperience.”
Williams agrees, although he says Clifford Chance has noticed the price pressure generated by the spin-offs.
“They want to buy in market share and it’s an issue we need to bear in mind when we’re looking at pricing deals,” admits Williams. “It does have an impact when you’re told that, when you’ve submitted what you think is a well-thought-out aggressive pricing structure for the deal, someone’s come in and bid a third of that.”
He adds that, for the international players coming in, there is more at stake than simply bringing in fees.
“It’s not all about doing a deal, getting the work and moving on,” he says. “It’s about building relationships in the medium to long term.”
Pekin points out that many of the spin-off firms will struggle to survive in any case, even without the rate cuts common in the market.
“Without being associated with an international law firm, spin-offs may not be very successful,” he says. “If you’re not a full-service law firm, if you don’t have a strong dispute resolution department, if you don’t have tax, if you don’t have capital markets, if you don’t have sector-specific lawyers, it’s hard to compete.”
Bener says successful Turkish independent firms will need to diversify to remain competitive. With an eye on a possible downturn in corporate work and price pressures, he says his firm is working at building up areas such as employment and immigration law, and has also recently signed an agreement with a Dutch debt collection agency to handle debt collection work.
The eurozone crisis is likely to have an impact on Turkey, although the extent remains to be seen. Lawyers are cautious about the prospects for 2012, with most predicting that the year is likely to be less busy than 2011.
“Turkish growth was very high, arguably too high, and the authorities would like to see that dampen down,” says Dunn. “They’re trying to constrain the growth of loans by the banks. The harsh reality is that there’s going to be a slowdown this year, because a lot of what they sell is into the EU. Every law firm in Istanbul will be pretty cautious about growth in terms of growing fee-earner numbers this year.”
While the high inflation levels do not concern practitioners too much, with most pointing out that until 2003 inflation was routinely above 60 per cent, Yegin says it could be an underlying sign of potential difficulties in 2012 as a side-effect of problems elsewhere in the world. But efforts to contain the weakening of the lira by the Central Bank of the Republic of Turkey could be a mitigating factor in supporting the growth Turkey is aiming for.
Whatever happens in the short term, the consensus is that the medium-term outlook for Turkey remains good. Those international firms making a play of it will have to work hard to bring in the deals, but success is a real possibility as the Turkish legal market continuesits development.
Turkey is one of the fastest-growing countries in the world, but its ambitious plans for the future could be tempered by high inflation and a weak currency. Despite this, international firms continue to pile in, in the hope of grabbing a piece of the pie.
Annual inflation (2011)
Life expectancy at birth
Unemployment rate (September 2011)
Source: World Bank, Turkish Statistical Institute
Where to eat and stay in Istanbul
For eating, Ulus 29 in the centre of Istanbul is one of the best. An amazing view in an elegant but relaxed setting, and excellent cuisine (both fish and meat). I regularly take clients to eat there and it is always a success.
To stay, I recommend the Edition Hotel to my clients and friends, not only because it is close to our office in the city centre and I did all its management contracts, but mainly due to its excellent service and nicely decorated rooms.
Cüneyt Yüksel, Yüksel Karkın Küçük
I strongly recommend Lucca in Bebek – cool, great food, great service, great crowd.
Charles Dunn, Kinstellar
The Çıragan Kempinski and Swissotel hotels and Papermoon and Park Samdan restaurants are best for business and pleasure.
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