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“They’ve done it,” went the awestruck whisper that traveled through the European legal market last June. After more than six months of on-and-off negotiations, the U.K.’s Freshfields and Germany’s Bruckhaus Westrick Heller L�ber had struck an unprecedented deal — a true merger of equals comprising unquestionably elite law firms in Europe’s two most important markets. The merger briefly gave Freshfields Bruckhaus Deringer, as the firm is now called, more partners in Germany than in London. The deal was all the more remarkable because Freshfields had already merged last January with its long-time German ally, 114-lawyer Deringer Tessin Herrmann & Sedemund; and because Bruckhaus — one of Germany’s two top firms — had previously resisted the charms of every suitor that had come knocking, including various U.S. firms, and the U.K.’s Clifford Chance and Herbert Smith. It’s easy to see Germany’s attraction. Ten years after reunification, Europe’s largest economy has caught fire, topping the table for European initial public offerings for the first six months of 2000 and accounting for more than a quarter of the Continent’s offerings, according to Thomson Financial Securities Data. Its corporate giants are on a buying spree in Europe, and its stock market rivals London’s as Europe’s most important. Everyone suddenly needs to have a presence there, and a leanly staffed outpost that can service existing clients is no longer enough for firms that want to get a major piece of the action. With so much global activity, Bruckhaus started looking for a merger in November 1998. “The demand for our services is going international,” says Bruckhaus partner Konstantin Mettenheimer, now joint managing partner for Germany, Austria, and Eastern Europe in the new firm. “Clients want one firm that offers services across a variety of regions and countries. In the next 10 years there will be a group of international firms that will be called on for international transactions … . We want to be among the top firms.” Bruckhaus has not been alone in such thinking. Freshfields’ coup capped a year of upheaval in the German legal market that can be described as nothing short of a revolution. One by one the country’s elite law firms fell to mergers and alliances, while others simply fell apart. U.K. — and, more rarely, U.S. — firms scrambled to get places on Europe’s business juggernaut before its momentum left them behind. Firms that missed the merger wave are making up for lost time by hiring laterally. The Bruckhaus decision to drop its independent stance and give in to the Anglo-Saxon onslaught shows just how far the country has transformed itself over the last half-century — from postwar wreckage, to a highly regulated, insulated economic miracle, to Europe’s business mecca. Several foreign firms, including Cleary, Gottlieb, Steen & Hamilton and Jones, Day, Reavis & Pogue from the U.S., and Allen & Overy and Clifford Chance from the U.K., got on board early and opened German offices soon after the government lifted restrictions against foreign lawyers practicing in the early 1990s. (Baker & McKenzie has been in Frankfurt since 1962.) And the Anglo invasion shows no signs of abatement. Numerous firms have recently established German outposts, including Hogan & Hartson, Willkie Farr & Gallagher, and Weil, Gotshal & Manges. And more are on the way. Mayer, Brown & Platt; McDermott, Will & Emery; Simpson Thacher & Bartlett; and Latham & Watkins have all expressed an intent to open German branches soon. The German legal market of barely a decade ago bore little resemblance to today’s hot spot. Few firms had more than 25 lawyers, and none were allowed to open offices in more than one city. That restriction was lifted in 1989, sparking a series of mergers among German firms driven by the need to serve clients located in different regions across the country. “Frankfurt is not a center in many other areas [apart from finance],” says Michael Oppenhoff, senior partner of 300-lawyer Oppenhoff & R�dler, which was formed through a series of four mergers starting in 1989. “You have three or four or six major business centers, and you would not be able to service Germany if you were just in one place.” No single German city, he notes, would justify the 300-lawyer firms that are needed to advise on the country’s biggest deals. It wasn’t long before the local-turned-national firms began to set their sights beyond the border. In 1990, for instance, Oppenhoff & R�dler was a founding member of the six-firm Alliance of European Lawyers referral network. “We couldn’t be a first-rank firm without an international network,” says Oppenhoff. The U.K.’s Linklaters joined the network in 1998 to form Linklaters & Alliance, and last July, Oppenhoff voted to merge fully with Linklaters in January 2001. “We have made a considerable leap from the late eighties, where we were restricted to partnerships in one court district, to the year 2000,” says Oppenhoff. “But we knew that as soon as the barriers to foreign lawyers would fall in the early nineties, we’d better get our act together. And we knew that cooperation and eventually merger was inevitable… . The best-friends networks we have all used were not good enough in a more concentrated international market.” As ever with changes in legal markets, the development of these international alliances reflects the transformation taking place in the wider business environment. Germany’s postwar economic model, in which a country almost destroyed by conflict has resurrected itself as Europe’s economic powerhouse, could hardly be more different from that of the U.S. Until just a few years ago, Germany had virtually no shareholder culture. Its companies were, and remain, largely privately owned. For investment they relied not on the capital markets, but on bank debt. The resulting system of cross-shareholding — in which banks and other financial institutions, such as insurance companies, are the primary corporate investors — provided the stability needed for rebuilding the economy. That changed with the 1990 reunification of East and West Germany, which put enormous pressure on the economic system. The huge transfer of money ($540 billion in 10 years) to East Germany after reunification was the single biggest factor in bringing Germany into the mainstream of Western financing techniques, says Georg Thoma, managing partner of Shearman & Sterling’s 80-lawyer German practice. “If you look at Germany and the development of the capital market,” he says, “at that time [of reunification] it was still bank loan-minded. But the banks didn’t want the credit risk, and they spread it by issuing bonds.” And equity. In 1998 Germany ranked fifth in the value of European IPOs, accounting for $4.825 billion, or 11.6 percent, according to Thomson Financial Securities Data. For the first six months of 2000, Germany topped the European IPO table with deals valued at $16.47 billion, or 26.4 percent of the total. Germany’s late arrival to the world of the financial markets is reflected in its finance center, Frankfurt. Skyscrapers shoot up incongruously along streets lined with shops. The pace feels more like that of a small town than of Wall Street or the City of London. Investment banks and the nation’s top law firms sit around the corner from Kleine Bockenheimer Strasse, which in summer is almost solely devoted to open-air wine drinking and where a business suit stands out in the crowd. But there’s nothing laid-back about the German economy. In October 1999, Europe for the first time overtook the U.S. as the region with the most announced M&A deals. In the ranking of announced European M&A deals for the first quarter of 2000, Germany placed second only to the traditionally deal-doing U.K. — up from seventh in the same period during the previous year. This frenzied activity is partly driven by forces common to all Western economies at the moment — a buoyant economy, the bull market for shares, and the pace of the technological revolution. The changes in Germany have not come easily. Alan Dunning, a partner in Cleary’s 31-lawyer Frankfurt office, says there was outright hostility to U.S. finance techniques and business methods. “Ten years ago you had the old style of people who had grown up in a hierarchical corporate environment with limited English language abilities,” he says. “People said, ‘Why do we need foreign law firms here? There’s nothing for them to do.’ And there wasn’t, based on the traditional methods.” But a new breed of internationally minded executives, combined with the arrival of the U.S. investment banks and German companies’ need to raise money in the global market, have broken down this resistance. Most importantly, the Mittelstand — the thousands of mid-sized, private German companies that drive the national economy — has come of age. These companies are either turning to the capital markets for the investment they need to compete globally — or the owner-managers who started them from scratch after the war are retiring and selling them, often to foreign buyers. Dunning dates the transformation in German business culture to 1996, when Deutsche Telekom AG listed on the New York Stock Exchange and had to disclose its results to meet the requirements of U.S. accounting standards. With that move, an equity culture began to develop as German companies started looking beyond their traditional sources of investment to the capital markets. The $140 billion hostile takeover of Germany’s Mannesmann AG by the U.K.’s Vodafone AirTouch PLC last February shows how far the country has moved. Having initially tried to resist the telecommunications company’s aggressive bid, Mannesmann opted for the best deal for its shareholders and accepted the bid. This already frenetic deals market is set to get an extra boost beginning in 2002. To encourage divestiture of cross-shareholdings, the government has eliminated the tax on the sale of these holdings, and has also slashed the corporate income tax rate. “It will have a very positive effect on the market,” says Peter Naegele, joint European managing partner of Clifford Chance. “We think it will fuel the number of mergers and acquisitions in Germany.” With the precedent of the Mannesmann deal and the prospect of more to come, it’s no wonder that firms like Freshfields have been scrambling to pick up German partners. Freshfields had been allied with Deringer since May 1998, when the two firms agreed to terms for a future merger and began integrating operations. “We couldn’t cope with the volume of work coming out of our network, and we could see that Germany as an important capital market was going to grow,” says Alan Peck, chief executive of Freshfields. In September 1999 the two firms voted to finalize the merger. Like Freshfields, other Magic Circle U.K. firms (except for Slaughter and May) have already set up sizable German operations to compete for cross-border deals. Their chief U.S. competitors have been Shearman & Sterling, with 70 lawyers and offices in Dusseldorf, Frankfurt, and Mannheim; and Cleary Gottlieb, which has 31 lawyers based in Frankfurt. Both firms opened German offices in 1991. Shearman especially has threatened the M&A dominance of the German firms, most noticeably by advising Daimler-Benz AG in its $38 billion merger with Chrysler Corporation. The latest U.S. entrant, Washington D.C.’s Hogan & Hartson, opened in November in Berlin, one of Germany’s two high-tech hot spots. (Munich is the other.) Raymond Batla, Hogan’s international practice coordinator, says that U.S. and European telecom and e-commerce clients are increasingly active in Germany. “As the government has privatized Deutsche Telekom, the activities that Deutsche Telekom has been engaged in have been opened up to competitors,” he notes. Hogan staffed the office by luring a team of 30 lawyers, including 10 partners, from Oppenhoff & R�dler. Not all of the top German firms have sought merger and alliance partners. Most notable among the stalwart independents is Frankfurt and Dusseldorf-based Hengeler Mueller Weitzel Wirtz, generally considered one of Germany’s top two firms (along with Bruckhaus). Hengeler began plotting its strategy of independence in 1995 by forging an “operational merger” with New York’s Davis Polk & Wardwell for capital markets work, an arrangement it has since extended to M&A. (Among other things, the two firms pitch together for deals work.) The firm also works closely with the U.K.’s top corporate firm, Slaughter and May; Spain’s Uria & Menendez; and France’s Bredin Prat. As their rivals have expanded more aggressively, this group of firms has strengthened its links by creating exchange programs for lawyers, harmonizing technology, and working together on training. “We are probably the firm handling the most international work in Germany, but it is still only 20 percent of our work,” says Oleg de Lousanoff, a corporate partner at Hengeler’s Frankfurt office. “If that changed to over 50 percent, we would consider whether it would make sense to follow the trend [and merge], but at the moment it’s not something we feel is necessary.” Hengeler’s competitors believe that they’ve taken the superior approach. Bruckhaus partner Mettenheimer argues that the Hengeler strategy won’t work, because clients want their lawyers to be integrated teams. And, while the U.S., U.K., and Germany are the most important countries for international deals, he asserts that Hengeler’s best friends “don’t cover enough jurisdictions.” Likewise, Clifford Chance’s Naegele doubts that Hengeler’s traditional 1:1 leverage ratio can provide the numbers needed on big cross-border deals. “It’s great if it works, but in times of globalization I find it difficult to believe it can last,” says Naegele. De Lousanoff defends the Hengeler system that takes only the top three percent of law graduates. It would be difficult to maintain the same quality at a ratio of 1:2 or more, he says. “And if the transaction boom stops or becomes slower, then these firms will suffer a lot because they have so many people to pay.” De Lousanoff believes his rivals may just be jealous that Hengeler was the first to form links with the top independent firms in key countries. “Freshfields Bruckhaus will have to start now to form seamless service teams of English and German lawyers, and we are ahead by years,” says de Lousanoff. “We have those teams and a track record of various transactions together.” Whether they’ve joined through mergers or affiliations, can any team of lawyers from different cultures and using different models truly be seamless? Certainly the Freshfields deal with Bruckhaus didn’t come easily. When the two firms first voted last April, the Bruckhaus partners did not have a large enough majority for the merger to go ahead. To get the deal through, Freshfields had to reassure Bruckhaus partners that theirs would really be a merger of equals. Freshfields’ major concessions included the use of both Bruckhaus and Deringer in the firm’s name around the world; the installation of Bruckhaus’s Christian Wilde as joint senior partner with Freshfields’ Anthony Salz; and appointment of joint U.K.-German global practice heads. And because the track to partnership is usually shorter for German lawyers, Freshfields also amended its lockstep system. While Bruckhaus may have carried off a true merger, many view the other recent linkups as mere takeovers that are likely to fail. “Most German lawyers believe [the other mergers] are not a merger of equals,” says Stefan Kraus at Cologne-based Andersen Luther. “There will be much movement in the market in the next one to three years … . Lawyers will depart, and others will join, and the business model will change.” There have already been plenty of defections from recently merged German and foreign firms. In June, Clifford Chance’s German managing partner, Thomas Heymann, jumped ship to head Willkie Farr’s new Frankfurt office. That same month, 10 lawyers from Feddersen Laule Ewerwahn Scherzberg Finkelnburg Clemm’s antitrust team left to set up their own firm; in September most of Feddersen’s Prague office defected to Altheimer & Gray. Boesebeck Droste lost four tax partners in Munich to Bruckhaus as Boesebeck prepared to merge with Lovells in November 1999. And the 30-member Oppenhoff team moving to Hogan & Hartson is just the latest in a string of departures from that firm since it allied itself to Linklaters. One Oppenhoff defector, Berlin partner Christoph Wagner, was concerned that Linklaters would focus too much effort on the Frankfurt office. “If everyone sees Linklaters wants to grow and approve partners in Frankfurt, we won’t be able to attract bright young people in Berlin,” he says. Wagner also contends that “17 or so” Oppenhoff partners were told they could not join Linklaters in order to boost Oppenhoff’s profitability. “Some of them were quite senior,” he says. “But they had great reputations, and I disliked the way those people were treated.” A firm spokesman confirms that 15-20 percent of the partners have left or will soon leave. Revenue is definitely an issue that merging firms have to confront. Top players like Bruckhaus and Hengeler average annual profits of about $1 million, putting them in line with the elite U.K. firms. But the numbers in other deals have the potential to cause contentions. Linklaters and Oppenhoff won’t reveal the profit-sharing formula they arrived at after long discussions. Oppenhoff simply says, “We have sorted that out. We may have done that differently from some competitors. There is a difference in profitability per partner between the U.K. and Germany, particularly on the basis of today’s exchange rate. But everybody is on lockstep.” There are other potentially divisive issues. German firms traditionally have a leverage ratio close to 1:1, while the U.K. standard is closer to 1:4. At the same time, German lawyers typically don’t start practicing until age 30 or older, while their U.K. counterparts start around 25. And the German partnership track of four to five years is considerably shorter than the U.K.’s eight-year haul. Which is all good news for newcomers to the market. “I would say the loyalty to the big [German] firms has significantly reduced,” says Hogan & Hartson’s Wagner. “The American firms are very powerful, and they offer a lot of money, and if you’re not happy with your firm, that’s an attractive alternative.” U.S. firms can offer German partners more than they would make in the lockstep of a U.K. firm, and they are looking to pick off teams or individuals to grow or start their German operations. Such instability could affect client loyalty as well, and German firms hope to cash in on a more volatile market. “The traditional ranking of firms was the same for years,” says Andersen Luther’s Kraus. “But if firms don’t stay the same, clients might think they should use other firms.” That’s certainly not the kind of problem Freshfields Bruckhaus Deringer wants — or expects — to confront as it moves ahead. But there will surely be hurdles, as joint managing partner Mettenheimer concedes. “One of the challenges for us will be that we will have to work hard to maintain esprit de corps in a firm of 1,850 lawyers,” he says. We’ll check back. It’s bound to be an interesting year.

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