Teutonic stress

In Germany, lawyers are reeling from changes brought about by mergers with top city practices.

Anne Mizzi explains how such alliances have broadened local firms' outlook

Taylor Joynson Garrett's link-up last month with Wessing & Berenberg-Gossler may have raised eyebrows because of the timing.

But although a downturn is not the typical moment to forge a cross-border merger, there is nothing unusual about Anglo-German alliances these days.

Indeed, mergers have changed the face of the German legal market.

'The market has changed dramatically.

If you look back five years it's beyond recognition.

It's quite amazing,' points out Christoph von Teichman, a partner at US-based Latham & Watkins in Germany.

Two years ago, Clifford Chance merged with Pnder Volhard Weber & Axster, and Freshfields with Deringer Tessin Herrmann & Sedemund.

Then Freshfields pulled off a second merger, with Bruckhaus Westrick Heller Loeber.

If that was not enough of a whirlwind, these developments followed hot on the heels of Linklaters' alliance with Oppenhoff & Rdler.

Until that point, only the US firms, led by Shearman & Sterling, had made any impact on the scene, with some top City firms' efforts not taken at all seriously by local lawyers.

As a result of the merger frenzy, most of the German heavyweights now form part of an Anglo-Saxon partnership.

Gleiss Lutz, CMS Hasche Sigle and Heuking Kuhn Luer Heussen Wojtek are formally tied to UK firms (Herbert Smith, CMS Cameron McKenna and Denton Wilde Sapte respectively).

And Hengeler Mller and Nrr Stiefenhofer Lutz are 'best friends' with Slaughter and May and Macfarlanes respectively.

This leaves only Haarmann Hemmelrath of the big firms free of City ties.

London-based partner Philip Newhouse says: 'We like being the largest independent firm and the only one with German expertise in London.

We get work from our own clients, firm clients and independent English and US law firms.'

Meanwhile, BBLP Beiten Burkhard Mittl & Wegener has opted for a continental partnership linked to KPMG and a tiny London office based at KLegal's headquarters.

But not all the UK arrivals have grown through merger.

Allen & Overy has carefully cherry-picked its German lateral hires, and equity partners there now contribute an average of more than 1 million to the firm's coffers.

Ashurst Morris Crisp's young office grossed less than 6 million last year, but new managing partner Wulf Merkel points out that Ashursts came 'fairly late' to the market, and without merging.

'We have all been affected by the strong downturn of the economy.

The major problem is the general depression in the market.

Law firms have slowed down their expansion plans because business is not what it used to be two years ago,' says Mr Merkel.

Clifford Chance partner Michael Weller agrees that the market has been quiet, but says the UK magic circle firms are doing 'reasonably well' out of structured finance.

'There are not really many deals in the market but our equity and capital markets guys are now helping in debt finance and restructuring,' he says.

Much of the activity comes from industry groups, says Mr Weller.

Clifford Chance is acting for groups such as Siemens, the electronics company, which is re-structuring to focus on core business, rather than what Mr Weller terms 'the unpleasant part of restructuring a company' (that is, sacking people).

And he says that as businesses look at their concrete assets, the firms' real estate practices are coming to the fore.

Because of the lack of capital markets activity, initial public offerings are rare and there have been no public takeovers.

Foreign firms are doing work they would not have anticipated before the slowdown.

Most of the action now involves restructuring and private acquisitions.

'There has been more financing and restructuring, and there is still a lot of merger and acquisition work because of consolidation,' says Herbert Smith corporate partner Martina Asmar, who spent four months at allied firm Gleiss Lutz.

'But the equity market doesn't seem to have picked up to a great extent.

People did say that with the tax reforms there were going to be masses of deals, but that hasn't really happened because the prices are so low.

If market conditions improve and the prices of assets and shares rise, the major corporates will decide to sell to take advantage of tax reforms.'

The German government's tax reforms were designed to attract inward investment.

But firms such as Freshfields, Linklaters and Clifford Chance, which expected reforms would lead to more buying and selling of companies, have been disappointed.

Mr Merkel says there are various reasons why the post-tax-reform boom never happened: 'People that wanted to take advantage of the reforms did forward sales.

After the market went down, people became cautious and anxious.'

A threatened reversal of the tax reforms and a re-introduction of capital gains tax on disposals of publicly quoted companies now seems unlikely following Gerhard Schrder's re-election as German chancellor.

'Everyone anticipated an upturn when the tax law changed, but that has coincided with a slump.

We are now busy with restructuring and the Neuer Markt is dead,' says Mr Newhouse.

The Neuer Markt, the Munich-based technology stock market, will close in 2003.

But Mr Merkel argues that this should not restrict exit opportunities for technology companies.

'There are two new categories in which you can list your company just as well,' he says.

Taylor Wessing's managing partner Gary Moss admits that the dull economic situation had some effect on the merger talks between Taylor Joynson Garrett and Wessing & Berenberg-Gossler.

'There is a slowdown in certain areas and that is an additional challenge, but I wouldn't want to overplay this,' he says.

'When money is tight people tend to look at these things much more closely.'

The merger went through in September, but Mr Moss says there is still work to do: 'One big difference is that they have five offices in five cities and we are 630 people, 610 of which are in one office (London).

When you are in one office you can just run up the stairs if you need to speak to someone.

Getting to know each other is one of the bigger challenges.'

Taylor Wessing has a single management board with equal representation from each side, and shares profits and a common name.

But the partnerships remain separate until tax implications and possible conversion to a UK limited liability partnership are investigated.

Mr Moss says he suspects that unhappiness is often caused by one side of a merger trying to impose its culture on the other.

'The one having the culture imposed on it has a tendency to kick back,' he says.

'You have to rely on the local experts and trust them because they know what is best for their particular market.'

Mr von Teichman agrees with Mr Moss's observation, and hopes to attract lawyers from firms where this has occurred to Lathams.

'Every merger can't necessarily leave everyone involved happy with the outcome,' he says.

The influx of City firms has also meant structural and cultural changes.

Charge-out rates, gearing and turnover tend to be lower in Germany, but they have come under pressure now the Germans are comparing their financial performance with the English and Americans.

German charge-out rates are a third less than City rates.

But the arrival of the City firms has pushed up junior lawyers' salaries.

Newly qualified lawyers in Frankfurt have seen pay rise by nearly 10% since 2000.

They now earn up to 50,000, which is the going rate for a newly qualified solicitor at top City firms.

The lower rates make 50,000 starting salaries much more difficult to sustain in a slowdown.

So, like their London-based equivalents, junior German lawyers are unlikely to get a pay rise next year.

Ms Asmar says City firms tend to have larger teams, with a ratio of one partner to three assistants, while a lower ratio of between 1:1.5 and 1:2 will be more usual in Germany.

In addition, many German firms have slowly begun to extend the length of the partnership track - traditionally about three to five years.

Now German associates are likely to have to wait seven years before they make partner.

In Germany, legal training is free and takes about eight years, with at least four years at university and three years' state training.

After passing bar exams, German lawyers have a constitutional right to practise law and can go straight into practice.

The constitutional court has ruled that it is illegal to restrict the number of lawyers entering the profession and the code-based legal system has been criticised as 'over-lawyered'.

Before international firms made their bid for Germany, traditional firms were smaller, less experienced in management and more generalist than firms in London.

'Nowadays firms have built departments for corporate matters and put groups in a department for private equity or takeovers.

It wasn't like that before,' says Mr Merkel.

Mr Newhouse agrees that there is 'no doubt' that German firms have become more specialised since English speakers arrived.

And transparency has improved, with associates receiving more financial performance information then they would in the past.

Another change, to practice rights, is likely to have less impact on working practices.

Traditional restrictions to court access, which resulted in sprawling regional or locally entrenched practices, have been lifted.

German lawyers have rights of audience in all German appeal courts.

But because local agency fees were small, this is unlikely to have a great impact on deals involving international firms.

International firms in Germany are concerned, however, with how to manage charge-out rates in the Euro-zone.

Ashursts has introduced a standard continental charge-out rate, but Mr Merkel says there is an argument in favour of variable rates in different markets: 'The biggest difference is between the City of London and the continent, but there are also differences between Frankfurt and Madrid, Frankfurt and Milan and Frankfurt and Paris, and it would be foolish to charge the same rate,' he says.

Haarman Hemmelrath has a particular problem, as it usually bills in Euros but must pay its London-based lawyers in sterling.

Another thing German lawyers will have to get used to is sharing space.

'Traditionally, in Germany when you started as a lawyer you got your own office and that was the norm.

Now, with the arrival of UK firms, that has changed a lot.

In Frankfurt, we share offices, and this is still uncommon.

It's difficult for some people to swallow,' says Mr Merkel.

But despite cramped offices, London remains a popular location for German lawyers and City firms are still doing well out of Germany despite the slump.

Anne Mizzi is a freelance journalist