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First came the British invasion. Then an incursion of New Yorkers. Now, California firms are scrambling to stake out territory in what is perhaps Europe’s hottest legal market: Germany. The country’s economy, the third-largest in the world, is booming. M&A activity is expected to increase with repeal of the capital gains tax on stock transfers next year, and Germany’s emerging high-tech, information technology, and new media businesses are thriving. As headquarters of the European Union, Germany is also seen as an entry point into Eastern Europe. “Two years ago, every American firm that came to us said, ‘We have got to be in London,’ ” says Alan Hodgart of the legal consulting firm Hildebrandt International. “ Now there is increasing interest in Germany.” Several top New York firms have long had offices in Germany. But the all-out push by U.S. firms to penetrate the market began in 2000. In the first merger of major U.S. and German firms, New York’s White & Case tied the knot last summer with 180-lawyer Feddersen Laule Ewerwahn Scherzberg Finkelnburg Clemm. So far, two California firms have jumped on the bandwagon. Los Angeles-based Latham & Watkins recently opened a small office in Frankfurt and is now in final negotiations to acquire the Hamburg office of Gaedertz Rechtsanw�lte, which has 45 attorneys. And in January, Brobeck, Phleger & Harrison opened an office in Munich — considered the Silicon Valley of Germany — through its joint venture with Boston’s Hale and Dorr. Opening an office isn’t the only way to jump into the market, of course. Other firms, such as Los Angeles-based O’Melveny & Myers and Gibson, Dunn & Crutcher, have affiliated with German firms, and several others from California are handling German work through outposts in other countries. THE BRITISH WERE FIRST But even though Germany is alluring, consultants and firm managers say that entering the market is difficult. They say the strong culture clash between the U.S. and German firms can make for rocky mergers. And even if firms are willing to push through their differences, there aren’t many merger candidates left: Most of the major firms and experienced attorneys have already been snapped up by U.K. entities. “We looked for two years to find the people we wanted,” says Brobeck chairman Tower Snow Jr., whose Munich office has nine attorneys. The legal landscape in Germany began changing about 10 years ago, when the government revoked a law prohibiting firms from working in more than one city. As a result, many German firms merged or were acquired by others. As German firms became national, they were also more attractive to U.S. firms. Also helping matters was the government’s decision to lift restrictions on foreign firms working in the country. As the rules eased, New York firms began opening outposts. In 1991, Shearman & Sterling, which until the White & Case merger had the biggest U.S. presence in Germany, hired an attorney with a corporate boutique in D�sseldorf. Since then, Shearman has grown to 100 attorneys in three offices. The firm’s German work is primarily focused on M&A transactions and the capital markets. Among the firm’s major deals, Shearman represented Daimler-Benz AG in its 1998 merger with the Chrysler Corp. and also advised Germany on the privatization of the former East Germany’s state-owned chemical, mining, and energy sectors. Consultant Blane Prescott of Altman Weil Inc. says that U.S. firms attempted to merge with German firms five years ago, but “most didn’t work out because of conflict issues and maybe some initial trepidation.” “The German market is tough to break into,” adds Christopher Kuner, of counsel in Morrison & Foerster’s Brussels office. “There is a culture clash between the United States and German way of doing things.” Enter the U.K.’s so-called Magic Circle of five top-grossing law firms. Three years ago, they began snapping up major German firms. In one instance, Clifford Chance merged with P�nder, Volhard, Weber & Axster. Freshfields merged first with Deringer Tessin Herrmann & Sedemund and then with Bruckhaus Westrick Heller L�ber. Today, U.S. firms are struggling to catch up, seeking merger candidates as well as lateral hires and affiliations with German firms. The timing also has become more critical. Firm managers anticipate an explosion in M&A activity once the capital gains tax repeal on stock transfers takes effect in January 2002. White & Case managing partner Duane Wall says the advent of the euro, which goes into circulation as the European Union’s currency next year, will also create more business opportunities. “It will facilitate trade among countries” and put pressure on midsize companies, he says. Many will “merge or sell out rather than face increased competition.” “There is going to be a tremendous amount of M&A [activity] in Germany because of the gradual unlocking of the ability to buy and sell companies,” says Latham & Watkins partner John Walker Jr. “Our clients are telling us that we have to be in Germany if we want the work.” Heeding the requests of its clients, which include financial institutions like Goldman, Sachs & Co. and Lehman Brothers, Latham decided to open an office in Germany’s financial center, Frankfurt. The four-attorney outpost became operational at the first of the year. Now, Latham is about to finalize a deal to acquire the Hamburg office of Gaedertz. Latham gained this foothold as a result of its 15-year relationship with the attorneys in the Hamburg office, which was the firm of Schon Nolte prior to merging with Gaedertz in 1999. Gaedertz has since imploded and Latham was able to make a bid for the Hamburg office. Once the acquisition is completed, Walker says, the Frankfurt office will be able to attract attorneys. To date, U.S. and U.K. firms have focused on Frankfurt. “It’s the city of choice,” says Peter Zeughauser of the Newport Beach, Calif., legal consulting firm ClientFocus. “It’s going to be the financial center for the European Union” and will probably be like London. FOCUS ON MUNICH Brobeck, however, is seeking to build a niche as the go-to tech firm in Munich. The city and the surrounding area is home to 4,000 companies in the high-tech, information technology, biotech, media, and aerospace sectors, says Brobeck’s firmwide managing partner, James Burns Jr. Munich is also the German headquarters for U.S. investment banks and several U.S. tech firms, including Apple Computer Inc., Cisco Systems Inc., the Compaq Computer Corp., the Oracle Corp., the Microsoft Corp., and Sun Microsystems Inc. For Brobeck, the area is wide open for a tech-focused firm. German firms “tend to be generalists” and don’t have networks with venture capitalists, investment banks, and technology companies, Burns says. “We think we bring a product to the market that doesn’t exist there.” To date, Baker & McKenzie is the only other U.S. firm to set up a Munich office. Before opening the Munich office, Brobeck handled German work out of its London office. Last year, the firm represented Goldman, Sachs and Deutsche Banc Alex Brown in taking chip-maker Infineon Technologies AG public on the Frankfurt and New York stock exchanges. Burns says the deal is the largest technology IPO to date at about 6 billion euros, or slightly less than $6 billion. The firm also handled the IPOs of other companies on the Neuer Markt, the equivalent of Nasdaq. Still other California firms are establishing a toehold in Germany without opening an office. O’Melveny & Myers, which has an affiliation with a couple of German firms, represents German banks, financial institutions, and high-tech and bioscience startups, as well as U.S. companies doing business in Germany. O’Melveny helped its first German client, Fresenius Medical Care Aktiengesellschaft, open an office in Walnut Creek, Calif., in the early 1980s. Recently, the firm assisted Advanced Micro Devices Inc. in obtaining financing for a $2 billion factory in Dresden. Ulrich Wagner, a partner in O’Melveny’s New York office, says he spends about a third of his time in Germany. A dozen of the firm’s attorneys “have very active practices related to Germany,” he says. And it’s an important source of income for the firm. Wagner says billings for one of his German clients averages $3 million to $4 million per year. Gibson Dunn also has represented German clients in financial deals for many years. The firm has an affiliation with two German firms. “If we found the right lateral partners, we would do something formal in Germany,” says Janet Zagorin, the firm’s director of practice development. Seeking to tap into Germany’s life sciences market, last year Heller Ehrman White & McAuliffe formed an arrangement with Frankfurt attorney Hans-Josef Schuster, formerly general counsel of the German pharmaceutical giant Boehringer Mannheim Group. Heller attorneys are assisting Schuster in litigation and licensing deals. In one case, Schuster is representing MorphoSys AG in patent litigation with the Cambridge Antibody Technology Group. In some instances, firms are moving into the German market by handling deals from other European offices. Morrison & Foerster handles M&A deals and provides litigation assistance to German clients primarily through its Brussels and London offices. MoFo also assists clients such as Fujitsu Ltd., Yahoo Inc., and the Intel Corp. with their projects in Germany. Similarly, Orrick, Herrington & Sutcliffe’s London office handles the “German law facets of global transactions we do,” chairman Ralph Baxter Jr. says. Although lacking a foreign outpost, Cooley Godward, too, has begun to build a client base in Germany. The firm has five or six attorneys who spend a portion of their time doing work for both German clients and U.S. clients expanding into Germany. “About a year ago, the German group coalesced,” says Thomas Shoesmith, coordinator of Cooley’s international practice group. CULTURAL ISSUES Heller and other firms say they are mulling over the best way to expand into Germany, taking into account the great expense involved in opening a foreign office. “Almost every big player in California is struggling to get to $1 million in profits per partner,” Zeughauser says. “They’re torn between sacrificing PPP and opening there.” Not only is the cost daunting, the disparity in U.S. and German cultures makes firm mergers difficult. MoFo’s Kuner says, for example, that attorneys typically don’t jump from firm to firm. “It’s almost seen as a black mark against an attorney,” he says. Foreign firms thus have difficulty hiring local attorneys. And in the words of Hildebrandt’s Hodgart, when U.K. and U.S. firms have imposed management systems, it “comes as a shock” to German attorneys. “Some say they would rather be a third-tier player than become an Anglo-Saxon firm.” Nonetheless, German firms are feeling pressure to merge to remain competitive. “With the dominance of U.K. firms, German firms feel they either have to go with a U.K. or U.S. firm or get left behind,” Altman Weil’s Prescott says. For their part, U.S. firms also may feel pressure to either merge or hire German laterals to launch a full-fledged office. “If you want to penetrate a jurisdiction, you need lawyers on the ground,” says Marcus Brans, manager of the business development department in Shearman’s D�sseldorf office. “If you want to get the real business, it’s easier to sell the client if you have one firm.”

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