Euro elite: focus Germany – Weltmeister

German independents maintain elite status in a fiercely competitive market, despite the attention of some formidable global players.

‘Our market is one of the most competitive in the world,’ asserts Tobias Bürgers, co-managing partner of Noerr, Germany’s largest independent law firm with 427 fee-earners. In 2015, Noerr increased turnover by 5% to €207.7m.

‘Over the last eight years, we’ve had 70% revenue growth. We’ve outperformed the market proportionately, relative to other firms,’ he adds.

But like those luxury car-makers in Munich and Stuttgart – some of which are among Noerr’s clients – several independent German firms can justifiably claim a reputation for excellence in Europe’s largest market. They are further helped by aggregate demand for legal services continuing to outstrip economic growth. Although Germany’s GDP grew by only 1.7% last year, law firms benefited from more inbound work as foreign investment swelled, boosting revenues.

However, last year’s biggest domestic deal – Vonovia’s bid for real estate rival Deutsche Wohnen – collapsed. The largest private equity deal, at €3.5bn, involved an Allianz Capital-led consortium buying Tank & Rast, a service station/restaurant chain, from Terra Firma. Hengeler Mueller and Noerr were among the advisers. Meanwhile, Deutsche Börse’s planned $30bn merger with the London Stock Exchange is the biggest outbound deal so far this year.

‘If you try to sell a Porsche for a VW price, then you wouldn’t be in business very long.’
Georg Seyfarth, Hengeler Mueller

But it is not just on significant deals where the major players compete. Across a broad spectrum of practice areas, independents face ‘ever more ruthless competition from international firms’, according to Beiten Burkhardt partner Philipp Cotta, referring to the 50-plus international players with German offices. He elaborates: ‘They are moving into areas like labour law. That was always something in which international firms did not have a strong interest because rates are lower than in corporate work. It’s the same with public sector work: international firms did not feature. Ten years ago, federal governments would have been hesitant to instruct Freshfields or Linklaters; they would prefer German firms. But that has changed.’

For German clients, such competitive pressure is good news, providing better value – typical charge-out rates in the local market are roughly half those of London or New York. In routine deals, hourly rates often give way to caps and alternative fee arrangements. Nevertheless, prestige work still carries a healthy premium. ‘If you try to sell a Porsche for a VW price, then you wouldn’t be in business very long,’ says Georg Seyfarth, co-managing partner at Hengeler. The transactional powerhouse advises 22 of the DAX 30, together providing roughly 50% of the firm’s revenues.

Seyfarth highlights the different expectations. ‘If a big German corporate client has a US deal, no question, they will pay more than $1,000 an hour for a partner from a respected Wall Street firm,’ he says, making it very clear that if any German lawyer asked for something similar, they would get short shrift. Domestic corporate activity, supplemented by increased foreign investment in Germany, helped Hengeler to enjoy its best performance last year since the crisis. ‘But this is not necessarily reflected in market rates,’ he adds.

The Euro Elite: Germany	Total lawyers	Total partners	No. of offices
Noerr	427	87	15
Hengeler Mueller	255	88	7
Gleiss Lutz	259	82	7
Rödl & Partner	635	150	106
Luther	279	114	16
Heuking Kühn Lüer Wojtek	303	130	10
GÖRG	296	86	6
Beiten Burkhardt	271	157	10
Flick Gocke Schaumburg	160	104	7

Beyond the international players, Hengeler’s closest competitor for high-end German transactions is Gleiss Lutz. Both independents have just under 260 lawyers, each with similarly low leverage: 82 and 88 partners respectively. Gleiss’ co-managing partner, Alexander Schwarz, reveals that it has been able to increase rates, albeit slightly: ‘It’s not dreamland, but it’s not bad either. Our market share has grown.’ Looking at what his top international competitors can achieve in their home bases, he quips, enviously: ‘That’s really incredible, a paradise for lawyers, but the German market is not comparable.’

Gleiss, which posted estimated revenues of €175m in 2015, is currently advising Volkswagen’s supervisory board over the emissions scandal. Reflecting its integrated full-service practice, demand for regulatory work remains strong, together with growth in areas such as product liability. Five years after the end of its alliance with Herbert Smith and Stibbe, Gleiss is strengthening its ties with Chiomenti, Cuatrecasas, Gonçalves Pereira and Gide Loyrette Nouel. However, this quartet is not yet as well-harmonised as the European ‘best friends’ group, of which Hengeler was a founder along with Slaughter and May.

Unlike most leading jurisdictions, Germany is multi-centred, requiring law firms to have four or five domestic offices. Some, like Heuking Kühn Lüer Wojtek and Luther, have ten. ‘In Germany, it’s necessary to be near to clients and have offices where they have their headquarters,’ says Heuking managing partner, Andreas Urban. His firm has grown dramatically in recent years, doubling in size to over 300 lawyers.

Heuking’s turnover was up 9% last year to €131.6m, partly due to 11 lateral hires motivated to join by the merit-based packages on offer. Urban points to US firm Greenberg Traurig as having the eat-what-you-kill model he hopes to emulate.

‘We will continue with our expansion strategy – clients view big law firms as successful law firms. Reputation grows with size.’ Some competitor firms, however, question the sustainability of his preferred business model with a lean, eat-what-you-kill approach largely anathema to the German way of doing business.

Like Heuking, most big German independents depend on the larger Mittelstand: German companies, typically family-owned, with a turnover between €200m and €3bn. ‘Germany is dominated by Mittelstand – they have different requirements and pricing from US corporations,’ says Elisabeth Lepique, co-managing partner of Luther, which has seen a recovery in real estate, together with more work in IT and data protection to help revenues climb 6% to €121m.

Many Mittelstand companies are now driven primarily by price, as one local partner observes: ‘When it comes to panels, we’re being squeezed by major clients. Bosch is particularly brutal. They have five or six firms on the panel. For every project, they each have to tender – and the cheapest wins. They say all the firms are capable of producing the quality they want. But they put too much emphasis on cost and not enough on other factors.’

Another beneficiary of the real estate resurgence is GSK Stockmann + Kollegen, which, although just outside the top 100, saw turnover increase 9% last year to €50m. ‘Usually clients expect lump sums or caps. We compete compared to international firms with flexible capacity and more adaptable pricing,’ says the firm’s co-managing partner, Olaf Schmechel. He has his own ambitious plan: a three-year target to boost lawyer numbers from 140 to 200 through ‘sustainable integration’.

Demand in other specialist areas has enabled some to flourish. A notable example is Flick Gocke Schaumburg, a major force in tax, which posted revenues of €110m in the last financial year. ‘Over the last decade, we have seen an average 8% increase in revenue every year,’ says partner Xaver Ditz. Transfer pricing and business restructuring are among its standout areas.

Among a crowded field of international players, Freshfields Bruckhaus Deringer stands out – every independent player acknowledges the firm. But last November, Freshfields announced the closure of its Cologne office, with most staff transferring to Düsseldorf, creating a rebranded ‘Rhineland office’. Meanwhile, 30 Düsseldorf IT support staff were made redundant as their roles were transferred to Manchester.

The Rhineland combination leaves the firm with 600 lawyers across five German offices. More significantly, Freshfields is reviewing German partners’ performance and the underlying points for partner profit distribution. Some may be culled or de-equitised. ‘They’re going through their entire German partnership,’ says an informed observer, ‘to see whether it’s necessary to have everyone who is on board, still on board next year’.

Set against these developments, the local recruitment market is increasingly fluid. Kirkland & Ellis’ rare hire of Hengeler corporate partner Achim Herfs was significant and other prominent moves include Gleiss hiring Eva Reudelhuber from Linklaters; Luther recruiting Tobias Leidinger from Gleiss; Noerr taking three lawyers from Freshfields; while Heuking took a seven-lawyer team from GSK Stockmann.

German firms have few natural expansion options domestically. However, with a quarter of its lawyers outside Germany, the East remains key for Noerr. ‘Our strategy is a bit different,’ says Bürgers. ‘Whereas other firms concentrate on Germany, we concentrate on Europe.’ They focus most effort ‘on the eastern European cluster, from Russia down to Romania’.

But Noerr is not alone. Luther has six international offices – the latest in Yangon takes its Asia total to three, while Heuking has a Zürich office and GSK Stockmann has recently opened in Luxembourg. Gleiss is more guarded about where it might go next: ‘We’re not planning to open any new offices in Germany. Our focus remains on inbound work, as well as taking our clients abroad,’ says Schwarz. Apart from joint offices with its best friends, Hengeler has ‘a successful Shanghai office with two partners on the ground’, serving the outbound needs of its DAX clients.

Inevitably contingent on a robust economy, German independents are uniformly optimistic that China will be a key engine for growth. Meanwhile, their own future in Europe’s largest inbound jurisdiction was given a symbolic boost last March: at over 200m tall, the twin towers of the relocated European Central Bank officially opened in Frankfurt. But while the new $1.4bn building symbolises Germany’s dominance in continental Europe, so the turbulent struggle for law firm clients in the world outside seems set to continue. LB