Two documents outlining the strategies of international firms in Germany came to light between 2016 and 2017. ‘Agenda 2020’ by Latham & Watkins set the goal of becoming the top outfit in the country by its titular date. ‘Germany 2020’ by Freshfields Bruckhaus Deringer, meanwhile, anticipated a reduction of the local partnership of more than 15% over the same time frame.
At first sight, the contrast appears to sum up the growing divide between advancing and retrenching forces in a legal market long torn between a confident wider economic outlook and disappointing returns on investment for global advisers.
Yet more than a year after an analysis of the country’s legal market, Legal Business returned to Frankfurt to find the mood resolutely upbeat. ‘We are very bullish about the German economy,’ says Oliver Felsenstein, who recently became the first continental European to ever sit on Latham’s management committee. ‘We’ll benefit from Brexit and the political environment is still stable. That all gives us confidence the market will grow.’
Latham’s sustained recruitment in Germany at the expense of the Magic Circle in the last 18 months has been comparable with its London advance. Clifford Chance (CC)’s banking partner Thomas Weitkamp, Freshfields’ young M&A star Tobias Larisch and Linklaters’ corporate partner Nikolaos Paschos all moved since August 2017. And the firm’s work on the €31bn float of Siemens’ medical technology unit demonstrates the inroads it has made with Germany’s big corporates.
Latham’s second-largest non-US operation after London, Germany brought in almost €150m last year and is approaching the 200-lawyer mark. ‘The foundation of continental Europe is on France, Germany, Italy and Spain,’ says Felsenstein. ‘The size of the market will allow for these to be another pillar of the Latham universe.’
There is no shortage of marquee deals for law firms to get their teeth into, such as The Linde Group’s $3.3bn sale of its American gas business, which saw local leader Hengeler Mueller and Linklaters advise the seller, while Freshfields and Latham acted for the acquiring consortium of gas manufacturer Messer Group and CVC Capital Partners.
The mid-market has also seen a flurry of activity, benefiting firms including the 550-strong CMS Hasche Sigle, which has in recent years dominated Mergermarket’s league table by deal count. Munich-bred Noerr, meanwhile, has almost doubled its revenue to €210m in the last decade and is bridging the gap with the local elite, its 500 lawyers spread across six branches in Germany and six in Central and Eastern Europe, alongside small outposts in London, New York, Brussels and Alicante.
Even as German GDP contracted for the first time in more than three years in the third quarter of 2018, investigation and litigation activity is on the rise, with the sustained fallout of the emissions scandal hitting Volkswagen being only the most prominent example of a wider trend. As such, the once corporate-dominated Hengeler has recently moved to substantially grow its contentious practice.
GDPR provided another huge source of work, as The Legal 500 Deutschland editor Anna Baubock notes: ‘There’s a growing effort by many firms to build up more substantial data protection practices, as nobody foresees an end to the demand for advice in this field in the coming years. The most reputable data protection lawyers largely remain where they have built up their practices, with the exception of one prominent coup: Tim Wybitul, who left Hogan Lovells for Latham.’
But here is the flip side. The drag factor of client expectations of broad coverage remains a pressing issue: firms wanting to deploy anything close to a full-service offering need to be in a wealth of locations, associates are expensive and average fees are 20%/30% below equivalent City rates. Even for Latham, which in recent years has allowed for more flexibility in adapting hourly rates to local markets, some question the profitability of the German operation.
Almost two decades after its three-way union, Freshfields remains the strongest brand in the market by some way.
It is tempting to conclude Freshfields’ retrenchment proves how hard it is to make money in Germany, even for the most established players. In the three years to May 2018, the number of partners dropped from 109 to 96 and the firm shut its Cologne arm in 2015 to focus on nearby Düsseldorf.
But appearances are deceiving. If there is one point on which there is agreement across more than a dozen interviews conducted for this piece, it is this: almost two decades after its three-way union, Freshfields remains the strongest brand in the market by some way.
Continental Europe head Helmut Bergmann is adamant that the drop in Freshfields’ partner numbers does not indicate a restructuring effort: ‘Our firm is going through a generational shift and we are seeing a number of partners retiring. Younger partners will take over the firm’s client relationships in the process.’
The firm did also lose a number of partners to rivals in 2018, including employment specialist Timon Grau to Linklaters (partner moves between Magic Circle firms are not uncommon in Germany). But revenue has grown steadily over the last five years, rising 10% to €405m in 2017/18 – the highest grossing firm in the market, accounting for a quarter of Freshfields’ global turnover. After a dip in 2016/17, lawyer headcount was up from around 450 to approaching 500 last year. Since the merger in 2000, Freshfields’ German practice has in some years been more profitable than London.
The rest of the Magic Circle has fewer reasons for cheer, wrestling with falling margins in their once core local banking practices. Nonetheless, Linklaters’ 330-strong German team is regarded as making significant strides in corporate. Its hire of Allen & Overy (A&O)’s former Germany senior partner, Neil Weiand, in particular sent a jolt through the market. ‘He is the man you should have when it comes to representing corporates in finance transactions,’ says Linklaters Germany chief Andreas Steck. Yet questions remain over the profitability of Linklaters’ continental European practices and the firm’s caginess over the financial performance does not help.
Meanwhile, there has been what is generally felt to be a bruising restructuring at A&O’s 250-lawyer practice. The firm’s shift towards corporate in the last two years saw a quarter of its partnership quit. ‘The overall number of partners is the same, but we created room for younger partners,’ comments Germany senior partner Thomas Ubber. Revenue from corporate has grown from 30% to 40%, while banking has fallen from 30% to 15%.
Those quitting last year included global head of employment and benefits Tobias Neufeld and German dispute resolution head Daniel Busse, who both set up their own boutiques. While the firm has upgraded its private equity (PE) practice through the hire of Nils Koffka from Freshfields, it will take much more to change the local consensus of a ‘pretty unhappy place’.
The fundamental question for Hengeler in the next few years will be talent retention.
The shift in tactics at the 300-strong CC has been as prominent, though the firm moved earlier than its Magic Circle peers to overhaul its local operation. After the effective takeover of Pünder, Volhard, Weber & Axster in 1999, the firm housed some of the best PE lawyers in the current generation, such as Latham’s Felsenstein and Willkie Farr & Gallagher’s rainmaker Mario Schmidt (who tragically died in October).
Again, CC’s restructuring plan launched in 2014 due to an increasingly unprofitable local operation and saw the firm strive to strengthen its corporate practice – the losses in its PE team show it met more than one hurdle along the way. The firm was able to scoop some high-profile hires, such as PE head Anselm Raddatz from Freshfields in 2015, but lost the former head of its successful real estate practice Cornelia Thaler at the end of 2018.
‘Cutting back was right,’ says Raddatz. ‘Now we are building a profitable business and revenue per lawyer has significantly increased.’ Still, revenue was down last year and is a far cry from the pre-Lehman years when the firm turned over comfortably more than €200m.
While restructurings have taken a toll at A&O and CC (the latter firm is felt by some to have now turned the corner), there are signs that a path to profitability can still be found. A group of US firms have managed to build lean but successful teams, including Sullivan & Cromwell’s 30-strong capital markets-focused Frankfurt team and Kirkland & Ellis’s 35-lawyer PE arm in Munich.
But the standout is surely Milbank, Tweed, Hadley & McCloy, which made Germany the only country outside the US and UK where it practises local law. With less than 50 lawyers in Frankfurt and Munich, the firm has built a lauded transactional operation. ‘We want to stay lean and agile because that’s what makes us most successful,’ says Frankfurt head Thomas Ingenhoven. ‘With Frankfurt and Munich, we cover the hubs for PE in Germany.’
More opportunities for US rivals might come out of the country’s domestic champion, 350-lawyer Hengeler. Still regarded as the only credible corporate rival to Freshfields, some question the sustainability of Hengeler’s model, with the lack of international coverage cited by critics as an issue for a firm chasing high-end mandates. Also noted is the question of generational change knocking after the retirement of corporate stars like Michael Hoffmann-Becking.
Co-managing partner Georg Frowein is adamant his firm has a strong roster of partners in their 40s, while its best-friend alliance with top European firms including Slaughter and May is a reliable source of cross-border mandates, such as Tata Steel’s joint venture with thyssenkrupp.
The fundamental question for Hengeler in the next few years will be talent retention. One of the most conservative firms in Europe, it keeps a tight equity with 90 partners in a pure, 12-year lockstep – ‘the secret of our success’, asserts Frowein. The firm had never lost a single partner to a competitor… until Kirkland convinced capital markets specialist Achim Herfs to make the switch in 2016. Perhaps even more significant is the loss of young PE partner Steffen Oppenländer to Milbank in the summer of 2017.
A further ominous sign for the German elite came last year with another departure from a well-regarded lockstep firm with a loyal partnership, 300-lawyer Gleiss Lutz: in April 2018 young PE co-head Jan Bauer quit for Skadden, Arps, Slate, Meagher & Flom, a firm with a few dozen lawyers between Frankfurt and Munich, and modest profile with German sponsors.
A handful of partners do not prove a trend and competitors concede Hengeler remains the hardest rival to hire from. Yet City veterans know all too well that it does not take long for a trickle of talent to become a flood, especially when more profitable US players can double the money of German partners.
Some moderate further inroads from a select pack of US firms look inevitable. The irony is that in a country of more than 80 million people and a wealth of financial and industrial centres, the winning model for those chasing the top end of the market has become a lean, focused team in one or two cities.