Rocky road to union

As the old European stereotypes melt away, the legal map of Europe is being redrawn by lawyers intent on forming alliances or mergers.

But Anne Mizzi finds that the devil is in the detail as theMid-sized city firms encounter problems with referral work

As Sweden's Lagerlf & Leman takes its final steps down the aisle with Linklaters, the City giant's plan to conquer Europe by alliance may not appear as outlandish as it did three years ago when Linklaters first proposed it.

The map of Europe is now criss-crossed with loose referral networks and tighter strategic alliances.

But often the union is not what it seems.

It may be formed as a precursor to merger, or there may be no intention of forming anything more than a superficial relationship.

In the past decade, commercial and corporate law firms with an international client base have looked at how they plan to respond to the global market.

A merger or new office can be a risk, while an ever-closer alliance with an established player in a key market has obvious advantages.Traditionally, many European firms have favoured some kind of an alliance over a full merger.

The UK merger partner is often in the more dominant bargaining position and firms are keen to avoid any suggestion that the merger is actually a takeover.

In addition, differences in culture, values, and profit-sharing systems are usually problematic in a straight merger scenario.

But even the mightiest alliance is not immune to a rocky patch.

For Linklaters, trouble began to brew at the International Bar Association conference in Amsterdam last October, when Belgian alliance member De Bandt Van Hecke Lagae & Loesch came under fire from partners at Allen & Overy and Clifford Chance for contemplating a raw partnership deal from London.

Then in April, Dutch alliance member De Brauw Blackstone Westbroek threw out merger proposals in a partnership vote, bringing into question the future integration of De Bandt, which is now in the middle of merger talks with Linklaters.

Terence Kyle, chief executive officer of Linklaters, says merger talks with De Bandt are 'moving in the right direction'.

He explains that De Brauw had 'felt that they were finding it difficult to see a way forward in merger negotiations and asked for a cessation for a time.

There had been signals that partners there were having second thoughts about the concept'.Mr Kyle says the original Alliance of European Lawyers was committed 'from the outset' to merger.

'We recognised in 1996 that we were not seen as credible by an increasing number of clients, in particular investment banks and corporates, to provide cross-border advice in Europe.

Clients were increasingly telling us that having a close relationship with another firm was not as satisfactory as dealing with Linklaters everywhere.' The Alliance of European Lawyers approached Linklaters 'from the other direction'.

The Alliance had been set up as a continental bloc, deliberately excluding a UK firm.

Mr Kyle says there was a reluctance about combining with a UK firm because of the huge movement in the European legal market, and the disparity in size between continental and UK firms.

He said that Linklaters and the Alliance's decision to join forces in 1998 'broke the mould as far as combinations between UK and European law firms are concerned'.

Mr Kyle says: 'There was clearly a commitment to co-operating as closely as was practical in terms of service to clients from the offset, and to work to align internal systems all with a view to moving from a contractual arrangement to a full merger.

We effectively created a structure which involved a two-stage process, because we realised that bringing five different firms together was a really major undertaking.

We needed to catch up with our competitors - and needed to do so relatively quickly.'Bristol-based Osborne Clarke's strategic director Simon Slater says Linklaters is 'perhaps the boldest experiment' as far as law firm alliances go.

But he sees the advantage in creating a powerful alliance and integrating each member at a later stage.

'That is the approach we have taken,' he says: 'We are agreeing each merger on a bilateral basis.'Osborne Clarke's Osborne Westphalen Alliance (OWA) became Osborne Clarke Alliance (OCA) this year after German ally Graf von Westphalen Fritze & Modest pulled out.

The UK firm had hired nine partners from Grafts.

Mr Slater says OCA now has a 'two-speed element' with Dutch, Danish and Finnish firms on the fast track to integration, and French and Belgian firms likely to join at a later stage.

'We are seeking to make Osborne Clarke a more relevant firm in five years' time - to the kind of clients we want - than if we didn't attempt it,' he says.

Osborne Clarke is not the only firm to have lured partners from its allies.

Last year, Hammond Suddards Edge left Commercial Law Affiliates (CLA) and then swooped on German member Knauthe Paul Schmitt so that it could establish a German office of its own.

CLA has also suffered further losses in Europe with the departure of Italian, Dutch and Swedish member firms.

CMS, Cameron McKenna's European network, has also experienced the ups of new members and downs of members leaving.

However, last week it unveiled a series of measures aimed at moving towards closer integration of the seven-member alliance (see [2001] Gazette, 21 June, 6).

For many mid-sized City-based firms acting on deals with a European element, the scramble for mergers and alliances has made it increasingly difficult to find high-quality independent firms to which they can safely refer work.

This is especially difficult for the many firms doing deals in Germany, because the German market has been particularly prone to Anglo-Saxon invasion.

Nrr Steifenhofer Lutz's recent pronouncement of a 'best friends' relationship with City firm Macfarlanes leaves only the middle-ranking and boutique German firms available for UK players looking to refer work to Germany without playing gooseberry to an existing relationship.

Before Gleiss Lutz Hootz Hirsch entered into its alliance with Herbert Smith last year, Ashurst Morris Crisp partners routinely sent work to the German firm.

But partners at Ashursts have confirmed that Herbert Smith is regarded as too much of a rival for the referral relationship to continue.

The phenomenon is not confined to Germany - partners in the Belgian office of PricewaterhouseCoopers' firm Landwell have also reported a decline in referrals following its decision to join the auditor's law firm network.

'Until a few years ago you could always find independent firms which any one could have a relationship with to refer work to in other countries,' a partner at a top-20 City practice complains.

'Now we find the people we used to send work to have formed international links with firms like DLA, so you don't know where the work may end up.'National firm DLA's seven-member alliance, DLA & Partners (D&P), has grown dramatically to become the fourth largest law firm alliance, so it is not surprising the firm is stepping on the toes of others.

Like Linklaters, DLA plans to merge its alliance members by 2003.

Now its alliance is in place, it will focus on integrating its systems and marketing the network as one firm as a precursor to merger.

While many alliances are designed to promote increasingly close co-operation between firms, not all will inevitably mature into a merger.

Hammonds' former ally is an example of an alliance with no plans for ultimate financial integration.

The Big Five accountants are the kings of law firm networks, but because of regulatory restrictions on multi-disciplinary practice, their local firms are sometimes stopped from merging with the global network.

Norwegian firm Vogt & Wiig became an exclusive ally of Ernst & Young's law firm network, but it may not join with the legal arm because of local Bar association rules.

Ernst & Young also came up against regulatory obstacles to merger in 1999, when it picked up Sweden's Tisell & Co from Cameron McKenna's CMS alliance.

Following the merger, Tisell's members are no longer allowed to practise as lawyers, though they still give legal advice.

Linklaters has also come up against this problem.

Mr Kyle says Linklaters' aim is to 'create a single entity' where it can, so that clients don't get confused.

But then just last week Linklaters announced a co-operation agreement with a leading corporate firm in Brazil.

'In practical terms [it is] a merger rather than an alliance.

But under Brazilian bar rules it has to be called something else.' Merger is also the aim for insurance firm Hextall Erskine's Clausen Miller Europe (CME) alliance, which plans to integrate financially after it has built sufficient critical mass in Europe.Like the decision to merge or not, there are variations in strategy for many alliances.

The BBLP European alliance - led by German firm Beiten Burkhardt Mittl & Wegener - aims to compete with the Anglo-Saxon European firms without a UK member.

Other alliances have been set up to deal with areas demanding multi-jurisdictional advice: Rowe & Maw has joined Ius Laboris' international employment law, pensions and employment benefits alliance, which confines itself to acting as an exclusive referral network for employment advice.

But there is another type of alliance that allows for the closest of relationships, while avoiding the public washing of laundry - otherwise known as the 'best friends' approach.

'Clients don't want the world turned upside down with integration,' suggests Herbert Smith practice development partner Richard Fleck.

Mr Fleck acknowledges that in practice Herbert Smith's arrangement with Gleiss Lutz has more in common with Slaughter and May's 'best friends' alliances than the Linklaters model, though Slaughters has no formal agreement with its German best friend Hengeler Mller Weitzel Wirtz.

Herbert Smith has a permanent co-operation agreement with Gleiss Lutz.

'We haven't merged our internal arrangements or constitutions.

The agreement makes it clear that we will form a closer and closer alliance.' Mr Fleck denies that there is any ambiguity in the current arrangement: 'We've gone to a great deal of care to make sure people do understand.

With clients, we have to be clear about what we are trying to do.' The alliance-with-a-view-to-possible-merger position delays much of the time-consuming negotiation and internal debate involved in a straight merger decision, leaving the firm free to concentrate on client and systems integration, while the two sides can get to know each other without too much pressure.But some firms still prefer to take advantage of merger opportunities while the iron is hot.

Freshfields Bruckhaus Deringer's chief executive Alan Peck says: 'We've gone through the merger or grow-your-own route.' Mr Peck argues that it is not only easier for the firm to quality-control a single client services network but it is also 'much better for clients'.

He says: 'You are only as strong as your weakest link.' Despite last week's wedding news, the alliance structure remains controversial.

A partner at a firm with an alliance suggests that the brand can obscure the true picture: 'If they succeed, what are they going to end up with? A pan-European law firm driven by the English law firm, or a true pan-European firm? Firms that have decided not to do that have been able to attract international work and remain successful into the bargain.' As Linklaters now attempts to surmount the hurdle of negotiating a merger deal with De Bandt, their differences in financial performance are likely to form the centrepiece of discussions.

De Bandt partners can decide to remain in the second tier of integration alongside Dutch and Italian Alliance members, but it remains to be seen for how long.'I would hope that we are a good way down the track,' surmises Mr Kyle.

'In the long term, a combination such as we established is only going to have a limited life.

It is essentially a multi-national joint venture.

Either it breaks up or goes to full merger.

Whether it will work for others, I don't know.' A point that those other players probably equally unsure of in the current helter-skelter market.Anne Mizzi is a freelance journalist