In February 2000, M&A partner Hans Rolf Koerfer left his office at the German law firm Oppenhoff & Radler, in Cologne, for the last time. Along with several senior colleagues he had spent the previous few months in negotiations with senior partners from London’s Linklaters & Paine to merge the two firms. But Koerfer had developed deep concerns about the deal and had urged his partners to reject it. Now, as the merger negotiations accelerated, Koerfer was getting out: he had secured a position with the American firm Shearman & Sterling.
Oppenhoff and Linklaters merged the following January. Over the ensuing years, Koerfer watched as Linklaters absorbed and reshaped his old firm. Then in November 2007, Koerfer received word from his colleagues in his old office that they, too, were leaving. Linklaters was closing the office in Cologne where Oppenhoff & Radler had been born. Eleven of Koerfer’s former colleagues were starting a new firm. Its name? Oppenhoff & Partner.
Now, Koerfer has come full circle. Having left Shearman for Allen & Overy in 2008, he rejoined Oppenhoff in September 2009. “I realised that the time was right to go back to the old business model,” he says.
And Oppenhoff is not alone. The last few years have seen a host of new independent firms spin off from the largest international firms in Germany. Ten years after the great British invasion of Germany, are the Germans fighting back?
A complex conquest
Germany was one of the most difficult European jurisdictions for British firms to conquer. Linklaters and Clifford Chance both held negotiations with various firms before finding their eventual merger partners. Freshfields found it easier, securing an enviable merger with two large, profitable firms; but the Germans drove a hard bargain, leaving the rechristened Freshfields Bruckhaus Deringer with three names and two senior partners – one German, one British. Allen & Overy was unable to secure a suitable merger partner at all, relying on an organic growth strategy that has had limited success over the last decade. And outside the magic circle, too, Germany proved problematic: Norton Rose secured a merger with the firm Gaedertz, only to see most of the firm’s offices split off, leaving them with a rump in Cologne. Herbert Smith has spent much of the last decade politely nudging its German ally Gleiss Lutz to consider a full merger, so far to no avail.
The difficulties are grounded in differences between the legal cultures of the two jurisdictions. Compared to City lawyers, German lawyers have traditionally been more academic and more generalist; most have PhDs, and historically many worked in both transactions and litigation. Partners are often more comfortable advising clients on even simple matters themselves than delegating to associates. Leverage of one assistant or fewer per partner was not uncommon in large German firms before the mergers of the early 2000s. “When I was starting out there were no specialisations,” recalls Koerfer. “Leverage was 1:1 or less. Clients wanted to deal with adults with experience, they wanted trusted advisers.”
Some of the more high-profile new firm launches in recent years can be seen as a result of these long-standing cultural differences. Take, for example, Raue & Partner. This Berlin firm was formed last year when an 18-partner team left Hogan & Hartson to set up an independent shop. It wasn’t the first time the team had moved: they originally fled to Hogan & Hartson from Oppenhoff to escape the Linklaters merger, much as Koerfer had moved to Shearman.
Raue’s partners say they’d never accept the restrictions that come from being in a modern, tightly managed international firm. “Linklaters is a very focused firm, and it tries to get its partners to be very focused too,” says Christian von Hammerstein, one of Raue’s partners. “We felt Hogan was a better partner, and we had a very successful ten years there.” The prospect of Hogan’s merger with Lovells presented the risk that the team would end up being swallowed by a UK firm after all. “We felt the merger with Lovells would put us in a similar situation as we would have faced at Linklaters. We’d be 50 lawyers out of 2,500.”
Indeed, it would be tempting to conclude that the breakaway firms that have formed in recent years are simply the result of older partners trying to recreate the glory days of pre-merger Germany. Oppenhoff is led by partners in their 50s; so is Schilling, Zutt & Anschütz, the former Mannheim office of Shearman & Sterling, which broke off en masse in April 2008 to reform as an independent under its old moniker and has since opened an office in Frankfurt.
Both firms present their time in international firms as a sort of aberration: Schilling, Zutt & Anschütz’s website refers to an “American intermezzo and ‘declaration of independence.’” Oppenhoff’s laments the Linklaters period as a time of “slackening of the traditional ties of lawyers to the firm, high fluctuation rates, the headhunting of entire teams by the competition as a result of the ‘new style’ of Anglo-Saxon firms.”
New kids on the block
But while these big-name teams have attracted a lot of attention with their moves, of greater long-term significance may be the slew of younger teams which have also broken away to form brand-new firms in the last few years. For the most part, these firms are being founded by partners who have developed their practices in an international firm environment only to conclude, often reluctantly, that their practices would have more scope for growth outside. Having broken away, these firms are finding they retain their international clients – and are even attracting new ones.
The trend began as early as 2003, when a breakaway team from Skadden Arps’ Frankfurt office formed boutique Broich Bayer von Rom. Following a merger with Berlin’s Bezzenberger, Broich now has nine partners and nine associates, and has attracted lateral hires from both Linklaters and Freshfields in recent years.
In the last couple of years, such new firms have become more common. In 2007 Wegner Ullrich Müller-Helle & Partner, a five-partner Berlin-based commercial firm, broke off from US firm WilmerHale. Then in May 2008 IP specialist Henning Harte-Bavendamm left Allen & Overy with a team of three associates to form the new firm Harte-Bavendamm. The firm now has four partners and is active for a number of German and international clients including Nestlé, Abercrombie & Fitch and Levi Strauss. “The experience was very encouraging,” says Harte-Bavendamm. “You hope your most established clients will join you. But surprisingly some of the less frequent clients have actually increased their business with us.” Other examples include employment boutique Truon (formed in 2008) and competition specialists Commeo (formed in 2010).
Not all breakaway teams set up as independents. Some are combining the advantages of being a startup with the support of an international firm. US firm Millbank founded its German practice in Frankfurt in 2005 with a team from Freshfields and has since grown to 12 partners. And the UK’s Olswang opened its first German office, in Berlin, in 2007 with a team of partners from Freshfields Bruckhaus Deringer. Today, Olswang has eight partners in Germany and acts for clients including Sony, Warner Bros., Henderson Global Investors and The Carlyle Group.
Taken together, these three kinds of breakaway firms – re-emerging old firms, new independent firms and new international firm startups – constitute the biggest shift in the structure of the German market since the mergers ten years ago. “It’s an amazing development,” says Martin Krause, a partner who left Linklaters for Norton Rose in 2008. “There’s enough profit in the market so people are simply saying, ‘Let’s do this on our own.’ And most of the new boutiques are quite successful.”
Why have so many teams broken away from the large international firms in the last few years? And do these new firms pose any real threat to the international firms’ dominance?
Room for growth
The new independent firms interviewed by Chambers Magazine all offered essentially the same reasons for leaving their international parents: the need to offer broader experience, and the possibility of promotion, to their young lawyers.
Henning Harte-Bavendamm, for example, hoped to see two of his senior associates promoted to the partnership. But, he says, he feared that his young lawyers would be unable to develop the range of experience needed for a broad IP practice in a transaction-focused international firm. “My strategic expectation was that in the long run, the large firms will only need one or two IP partners per country to accompany transactions,” he says. “That work can be very interesting, but it’s not the best way for young lawyers to learn. You only gain experience in this field if you gain a lot of experience in court and in advisory work. It’s impossible to get and maintain a high level of that experience at a large firm.”
For Commeo, it was a similar story. “Baker & McKenzie’s German management were very focused on building their M&A capacity, and needed strong support from the competition team to do that,” says Stephanie Pautke, one of Commeo’s partners. “As a four-partner team we were already too big to focus entirely on merger control work, but we had the potential to grow in the cartel area.” Pautke and her colleagues felt their younger lawyers would have poor prospects of promotion within Baker & McKenzie: “In the end, we thought we could achieve greater development outside the firm than inside.”
The simple arithmetic of partnership at large international firms in Germany makes it harder for young lawyers to be promoted. The international firms have all reduced in size in Germany since their mergers, particularly at partner level. Clifford Chance had 125 partners in Germany immediately after its merger with Pünder, Volhard, Weber & Axster; now there are 89, of whom no more than 50 are believed to be equity partners. Oppenhoff had 123 partners before its merger with Linklaters; 40 left in the lead-up to the merger or immediately afterwards, and further departures over the years mean Linklaters in Germany now has just 65 partners. Even Freshfields, widely considered to have carried out the most successful merger, has shrunk.
Some of the shrinkage has come from periodic reorganisations, most recently in 2009 spurred by the financial crisis. But as well as periodic clear-outs, the largest international firms have shrunk their German branches by tightly controlling partner promotions. Linklaters, for example, promoted four German associates to partner in 2008, two in 2009 and just one in 2010.
This tight control of partnership has helped close the gap in profitability between the German and UK wings of international firms. The combination of low leverage and lower fees than in most jurisdictions made Germany a low-profit jurisdiction for most international firms immediately after the mergers. But years of raising leverage and squeezing partnerships have helped close the profitability gap.
For example, Linklaters’ profits-per-partner in the year leading up to the merger were £725,000; Oppenhoff’s merely £265,000. Linklaters went as far as to place its German partners on a special reduced version of the lockstep, whereby senior German partners earned 20% less than their London equivalents. But over the last two years, following the almost-halving of the German partner roster, Linklaters has transferred its German partners onto the full lockstep for the first time. “We’ve gone through a major process to transform the German practice, and as a result the profits have risen significantly,” says managing partner for Germany Carl-Peter Feick.
But a side-effect of this restraint has been to make partnership prospects for young lawyers even more dim than for young partners in London or Asia. That proved a decisive factor in the departures of most breakaway firms.
“The type of firm we wanted to live in, and work in, requires that you continue to have young people becoming partner. That became increasingly difficult in the Linklaters environment,” says Georg van Wallis, who left Linklaters in 2008 for Olswang. Christian Schede, who joined Olswang from Freshfields a year later, reports the same problem. “The top associates in our team had no future. We risked losing a team we’d spent years building up.”By breaking away, these partners gained the freedom to promote their young lawyers. Henning Harte-Bavendamm, for example, set up his new firm with two of his former associates as partners.
And the new firms are taking advantage of independence to operate with leverage that is appropriate for their practices, but unheard of in international firms. Both Harte-Bavendamm and Commeo have two partners to each associate. Pautke says Commeo is aiming for 1:1 leverage in the long term. (At Baker & McKenzie Germany, the leverage is 4:1.) “Huge leverage is discouraging both for young talent, and for clients who don’t get the expertise from partners that they want.”
Dr Lars-Gerrit Luessmann left Linklaters for Broich Bazzenberger last year. “The large firms have reached their growth potential in Germany,” he says. “I loved working with Linklaters, but I prefer being in a young, ambitious environment where you have the opportunity for growth.”
Revolution or rebalancing?
Do these new startups represent a fundamental shift in the German legal market? Hans Rolf Koerfer believes so. He argues that the in the aftermath of the financial crisis clients have lost their appetite for the cost of large firms.
“I left Oppenhoff because I didn’t believe clients would accept the UK system – huge leverage, endless 5,000-page documents – in Germany. I was wrong: clients didn’t like it, but they had to accept it because there were so few independent firms left,” he says. Now, though, Koerfer believes “clients are longing to return to the old ways of doing business.”
There’s no evidence that clients are deserting international firms en masse. But these firms are certainly not being punished by clients for breaking away from their international parents. Most have retained their rankings in Chambers Europe as independent firms. Clients generally told the guide they found the teams no less effective as breakaway firms.
One client – the general counsel of the German subsidiary of a major pharmaceutical multinational – told Chambers Europe: “We have been instructing Oppenhoff & Partner – or at least, the lawyers – for over 20 years. This firm, or rather the lawyers we work with, will always be our first choice for healthcare work.” An energy client of Oppenhoff, another local affiliate of a multinational company, said he “couldn’t see any difference in quality” between the boutique and his other main firm, Clifford Chance. While these new firms look set to survive and win work from international clients, it’s not clear that it’s work that the large firms will particularly miss. Many startups operate in practice areas the large firms were already de-emphasising – hence the difficulties of promoting partners.
Some breakaways do contain highly regarded corporate partners and have done deals international firms would have preferred to do themselves. For example, when the partners of Schilling, Zutt & Anschütz left Shearman & Sterling, managing partner Jochem Reichert took with him a highly prized client – Daimler. He has since advised the car-maker on an investigation by the French authorities into its shareholdings in France’s EADS as part of an insider trading probe.
But for the most part, these senior partners seem to be happy working with their long-standing clients rather than winning new ones. Hans Rolf Koerfer, for example, is a well-regarded corporate practitioner with a substantial book of business. But a large proportion of his work in recent years has been for one client, manufacturer the Schaeffler Group. He advised it in 2009 on its acquisition of rival Continental, and was then installed by Schaeffler as Continental’s supervisory chairman – the very epitome of the ‘trusted adviser’ model of lawyering.
It seems unlikely that any new clients will begin to use these new firms for work that the large international firms would actively covet. “Talented people do leave and form boutiques, and of course they do sometimes manage to take smaller client relationships,” acknowledges Klaus-Stefan Hohenstatt, Freshfields’ managing partner for Germany and Austria. “But it’s not real competition for a firm like ours.”
Stephan Eilers, who recently became Freshfields’ worldwide executive partner, acknowledges that small, specialised firms can thrive in the German market to a greater extent than other markets. “You can function perfectly effectively with six partners in Germany in a way you couldn’t in other jurisdictions,” he says. “Mittelstand companies remain prepared to use smaller firms in a way that FTSE 100 companies, for example, probably are not. These firms can maintain a ‘trusted adviser’ status with a few key clients and remain very profitable doing domestic work. [But] when those clients are expanding into China they’ll come to us.”
Certainly, those lawyers with more international practices still see international firms as an essential base of operations. Media partner Christoph Wagner was the ringleader of the team that moved from Oppenhoff to Hogan & Hartson in 2001; but when his team moved on again to avoid being swallowed up by Lovells, Wagner, its biggest rainmaker, stayed behind. “Sadly, I cannot join my friends in their cosy office,” Wagner told the Lawyer. “My clients require an international structure. I need a platform that’s adequate. I cannot work in a Berlin-based firm.”
A fragile equilibrium
The existence of this new class of breakaway firms – old firms returning, new independent firms and a few new international firms – demonstrates that the takeover of the German market by international firms in the early 2000s has not progressed as smoothly as might have been expected. Though some clearing out was inevitable given many German merger partners’ low profitability, few would have predicted the across-the-board shrinking that these firms have carried out in Germany in order to get their financial houses in order. And that shrinking has not been a straightforward process – Clifford Chance’s restructuring in 2009, for example, left the firm facing a lawsuit from two disgruntled ex-partners that is still ongoing. And it is not clear whether any return to ‘growth mode’ is on the horizon. “We’re not the Soviet Union with a five-year plan. The number of new partners will depend on the business opportunities,” says Stephan Eilers of Freshfields.
It seems likely, therefore, that more breakaway firms will emerge. And those that have been born in the last three or four years seem to be maintaining the support of international clients, at least for commercial matters.
But while this class of firms may grow – adding welcome diversity to the German market – there’s no sign as yet that they pose any serious threat to the domination of the market by the large international firms (as well as one or two independents, notably Hengeler Mueller). Were more major names in corporate or banking to make the move, that would change, but research suggests that transactional clients remain partial to international firms of some size.
Those that have made the move, though, are not concerned with its ramifications for the market. They are merely enjoying what they describe as a lower-pressure, but more entrepreneurial, way of life. “When I receive a mandate I can be working on it in five minutes. It can take two days to get approval for new clients at an international firm,” says Hans Rolf Koerfer. “It’s like having moved from an oil tanker to a small sports boat.”