Teutonic plague

Kohl has gone, Lothar Matthäus has finally retired and German spectacle designers seem to have learned that less is more. Even the last vestiges of marbled denim have been driven out of the eastern states. The 1990s in Germany has finally undergone closure. It may have taken years, but many of the mergers which started the decade as a reaction to German reunification are only now being tested. Their initial logic is being probed: can German firms be successfully integrated into larger, international practices?

Alternatively, as with Hengeler Mueller Weitzel Wirtz, and at least until recently Wessing, German firms have had the confidence to declare independence. “We have confounded the critics and Cassandras in other law firms with our successful strategy of maintaining our independence and not wandering down the merger alley with a UK firm,” declares Andreas Austmann, a partner at Hengeler Mueller.

The final outcome? The tensions between offices and practice groups which were present right through the 1990s merger process proved too much to be able to keep firms together. It is this phenomenon which has haunted German lawyers.”The most important thing for us throughout the whole merger process was that our firm stayed together,” insists Burkhard Bastuck, a Bruckhaus partner based in Frankfurt.The events at Linklaters Oppenhoff & Rädler over the past few months, as well as the cataclysm that broke apart Gaedertz, were almost preprogrammed. One Schön Nolte Hamburg partner (the part of Gaedertz now joining Latham & Watkins) says: “The vote to merge with Gaedertz was by no means unanimous. Of course, we all supported the decision, but there were some who thought that the offices of Gaedertz were too heterogeneous to allow us to make the jump to the international stage.”

But the reason behind the formation of Gaedertz seemed at the time acutely logical. Along with the major offices in almost every notable market, a group of regional firms in Cologne, Berlin, Wiesbaden and Munich joined forces to take advantage of the reform in bar regulations, which allowed law firms for the first time to have offices in more than one court district. Gaedertz gained the all-important Frankfurt office in 1997.

Schön Nolte in Hamburg had been one of the most highly-respected firms in northern Germany for some time. Its clients included British Petroleum, Rothmans, SAS Raddison, Der Spiegel, Riva and South African Breweries. It had tried to exploit its longstanding Linklaters contacts by setting up a joint venture in Frankfurt in the mid-1990s under the Linklaters & Schön marque. However, few German lawyers were surprised when the City firm left its Hamburg partner in the lurch for the much larger Oppenhoff & Rädler, leaving Schön Nolte to opt for national expansion with Gaedertz before attempting another international partnership.

But any merger that produced a heterogeneous collection of offices (the more, the worse) would have to face the challenge at some time of addressing their differing rates of profitability. Norton Rose argues that it has landed the most profitable office within Gaedertz, but there is more to this than meets the eye. “Cologne was the most profitable Gaedertz office,” acknowledges one Hamburg source, “but that has much to do with the age of the office. The partners are younger, and the profits are distributed among fewer lockstep points. They do have a good practice and great lawyers, but the figures are flattering.” One former Gaedertz lawyer agrees, adding: “The Cologne office doesn't have the same international connections or potential as Hamburg.”

Gaedertz was not alone in being unable to achieve full integration. Many of the 1990s mergers found the well-trodden practice group route to a unified firm to be far more difficult than imagined. The problems faced by these firms demonstrates the fundamental challenge facing UK and US firms entering Germany: how do they find the perfect balance of practice group and Standort?

The concept of Standort is crucial in understanding German legal culture. The word denotes “location” and carries with it the whole of the regional, federalist baggage that has structured post-war Germany. German managing partners never speak about “offices”; they refer instead to the various Standort a firm has. German law firms function differently from other major European jurisdictions because of the necessity of running at least four major offices (Hengeler Mueller being the only exception), with each Standort having a full service and a similar status, even if the practice emphasis may be a little different.

Each Standort will have a different disposition as far as its work and clients are concerned, and usually its own culture. Walk into a Frankfurt Hengeler Mueller office and you could never mistake it for Düsseldorf. Clifford Chance Pünder's Berlin practice bears little resemblance to Frankfurt. It is just this heterogeneity which has been the secret of these firms' successes, since the deep roots in the respective regional economies have allowed the offices to build up practices which demonstrate a strong degree of autonomy to take advantage of that federal structure.

However, the teams in the individual offices had to be integrated in order to meet the challenge of cross-border transactional work. Not by moving lawyers around (German lawyers are too much the regional patriots for that), but by investing heavily in IT and collecting air miles.

But those firms which pushed integration forward by the implementation of such national practice groups were only able to do so because differing profitability was not an issue. Their less fortunate colleagues in other firms were forced to wait. Since the remuneration system was based on the particular Standort, these had to grow together financially before proper practice group integration could take place.

In the case of Gaedertz, the shared clients, social interaction and newly-struck friendships all came to nothing. The events of the past two months, which have rocked the German market, have shown that even if the firm had signed a merger with Norton Rose, it would never have remained intact. The firm as a whole was simply not unified enough. The rainmakers could easily have been picked off, and in the end less profitable partners would have had to find new pastures, not unlike what happened at Oppenhoff & Rädler.

Could Norton Rose have done anything to stop it? Here, as elsewhere, Gaedertz partners disagree. One Hamburg partner insists that the problem lay with Gaedertz and not with the UK firm. But an ex-colleague says: “It showed that the last merger Norton Rose undertook was in 1962.” Indeed, while Norton Rose was struggling with its M5 project in the early 1990s, its stiffest competition was lining up offices on Continental Europe. There are plenty of lawyers in Germany who think that both Linklaters and Norton Rose were all too aware of the impossibility of merging with their chosen firms – hence the quite different management strategies demonstrated in comparison with the Freshfields or Lovells management, who bent over backwards to please their Teutonic fiancés.

Throughout the Gaedertz-Norton Rose process grumblings were heard on the German side. One Frankfurt partner states: “The sort of partner-to-partner contact which seemed obligatory for [Freshfields and Bruckhaus, and Clifford Chance and Pünder] never came about during our negotiation process.” And Norton Rose was seen as adding fuel to the fire by publicly proclaiming in November (The Lawyer, 20 November) that should the merger not go ahead, it would open its own office in Frankfurt anyway.

But in the final analysis most Gaedertz lawyers admit that the merger broke down not because Norton Rose was not wedded to a full-service culture (the shipping and transport lawyers in Germany were attracted by the maritime practice in London, for example), but because the numbers involved in Gaedertz's particular all-round practice did not add up. At Bruckhaus, Lovells and perhaps sometime soon at Gleiss Lutz, they do.

But this raises another question: who is defining the numbers? Lawyers at Oppenhoffs never fail to point out that the fewer lockstep points which they have been awarded still buys them a house twice the size of their London colleagues'. In other words, German partners have a buying power which makes a £1-DM3 rate look absurd, even if one ignores the generally recognised overvaluation of sterling. (As a digression, it is revealing that Bruckhaus partners never resort to this line of argument, which means either Oppenhoffs and Lovells partners are simply trying to justify their lower drawings, or alternatively that Bruckhaus woefully undersold itself – again.)

The argument over skewed remuneration raises the issue, however, as to why the philosophy of lockstep straddles practice group boundaries, but not national borders. UK M&A lawyers seem prepared to recognise that their fellow UK employment lawyers deserve the same remuneration, because an employment capability is vital to gaining the instruction from a particular client. But they are less willing to pay their German M&A colleagues the same, even though this German corporate capability is central to gaining new clients or, more pertinently, retaining old ones.

It is just this conundrum that the successful mergers within Germany managed to solve. The unsuccessful mergers were characterised by the proverbial corporate lawyers in some offices being happy to share their profits with employment neighbours in the corridor, but not with their M&A colleagues in another office. In contrast, other merged German firms managed to break out of that vicious circle, which was established in the early 1990s: different Standort profiles that did not allow proper practice group integration strengthen an isolationist office mentality.

German lawyers increasingly emphasise nowadays that the assimilation of the different Standorte in Germany can only come about through underscoring their particular identity and integrity. Bruckhaus and Hengeler Mueller have achieved this by building up stock corporation law (Aktienrecht) centres of excellence in Düsseldorf, and Pünder has a focused patent litigation practice in the same city. Shearman & Sterling is aping Hengeler Mueller and Bruckhaus by building up its stock corporation law capability in the ex-Schilling Zutt & Anschütz office in Mannheim. Gleiss Lutz has employment and administrative concentrations in Stuttgart, but its property practice is centred on Berlin.

The key point is that such practice focus is almost always due to historical reasons internal to German law firms and often has little to do with the putative “character” of a regional market and its client base. Yes, there are a large number of corporate blue-chips in the Rhein-Ruhr area, not far from Düsseldorf. But this cannot explain the concentration of outstanding corporate lawyers there, not least because nowadays they are just as likely to fly down to advise Allianz in Munich, Deutsche Bank and Commerzbank in Frankfurt or DaimlerChrysler in Stuttgart. In any case, the industrial client base in Munich, Stuttgart or Hamburg should logically have generated a similar concentration of corporate lawyers as in Düsseldorf- but it hasn't.

There are not many UK or US firms which have been faced with the difficulty of managing a number of such offices. Until now, that is. The first two months of 2001 have brought a group of them into the German market. While DLA and Hammond Suddards Edge announced modest steps last week, the really significant moves came with the break-up of Gaedertz. It is perhaps no accident that LA firm Latham & Watkins saw its main chance in Hamburg, and that the two Chicago firms – Mayer Brown & Platt and McDermott Will & Emery – are the front-runners for the Frankfurt Gaedertz office.

UK firms claiming to have found a corporate Eldorado in Düsseldorf or an IT nirvana in Munich may therefore be disappointed, unless they have recruited in those cities the best lawyers from those firms with such a tradition. As one source observes acerbically: “Foreign firms might have moved on from Frankfurt, but just going to Munich or Düsseldorf won't achieve anything.”

If UK firms have learned anything from the last two years, it is this: respect the regions.

Aled Griffiths is editor of German legal news magazine JuVe Rechtsmarkt