(Illustration by David Ryski)

Correction, 5/7/2014, 12:00 p.m. EDT: An earlier version of this article misstated the number of lawyers in the Frankfurt and Munich offices of King & Wood Mallesons SJ Berwin as 100; the number is actually 70. The second paragraph of this article has been changed to reflect this correction. We regret the error.

In most European countries, 
when an international firm decides to set up shop, it’s fairly obvious where the office should be based. In the United Kingdom, you go to London. In France, you go to Paris.

Not so in Germany, whose decentralized economy makes it a far harder strategic nut to crack. In March, the newly combined King & Wood Mallesons SJ Berwin shuttered its Berlin outpost after conducting a review of its German network, which also includes 70 lawyers in Frankfurt and Munich. Yet when Herbert Smith Freehills and Morrison & Foerster arrived in Germany in 2013, they chose the German capital as the site of their first offices in the country. Those moves, meanwhile, followed the shock decision by Shearman & Sterling last year to close two-thirds of its network in the country. The firm, which had already shut its Mannheim office in 2008, closed its Düsseldorf and Munich bases in April 2013 to focus its entire German practice on Frankfurt. Within only two weeks, Latham & Watkins had hired three of Shearman’s Düsseldorf-based partners to establish its own office in the city—Latham’s fourth in Germany.

As recently as 25 years ago, law firms were restricted to operating just one office in Germany. That all changed with the country’s reunification in 1990. With law firms now free to open wherever they choose, the market has been home to a series of mergers, office openings and lateral hires all over the country. For a global firm with its eye on the German market, should it launch in Frankfurt or Munich? Düsseldorf or Berlin? Or some combination of those cities?

“One U.S. law firm closes in a city and another decides to invest at the same time—you could ask why the hell is that happening,” says Ansgar Rempp, regional managing partner for Germany at Jones Day, which has offices in Frankfurt, Munich and Düsseldorf. “But the German legal market is significantly more complicated than other, more centralized markets like the U.K. or France, so it’s not surprising that large global law firms have such different strategies here.”

International firms seem to agree on one thing when it comes to Germany, however: the importance of having an office in Frankfurt.

Of the 49 Global 100 firms with practices in Germany, 41 have offices in Frankfurt, collectively employing 1,842 lawyers, more than twice as many as in any other city in the country.

The attraction is clear. Frankfurt is arguably the second most important financial hub in Europe, after London, and is home to the majority of all banking and capital markets work in Germany. (The Frankfurt Stock Exchange is the world’s 10th-largest exchange by market capitalization and accounts for over 95 percent of all transactions in German equities. Deutsche Börse, which operates the exchange, is a long-standing client of Link­laters, which has 162 lawyers in Frankfurt, second only among the Global 100 to Clifford Chance, which employs 229 lawyers there.) The prevalence of investment banks and financial advisers means that most major transactional and cross-border work also flows through Frankfurt, even if none of the parties involved have any direct links to the city. The European Central Bank, which administers monetary policy for the Eurozone, is also based in Frankfurt.

“If you are a major commercial law firm, you have to be in Frankfurt,” says Markus Hartung, former German managing partner at Linklaters (and before that, of German firm Oppenhoff & Hadler, which merged with Linklaters in 2000), and now director at the Bucerius Law School in Hamburg. “Frankfurt is home to all the major banks, the capital markets, and is ideally located. It has the largest airport [in Germany], and you can reach all the other German cities within four hours by train.”

Shearman has wagered its entire German practice on the power of Frankfurt. At one point, the firm had more than 100 lawyers across four offices in Germany. Now, it has just 36—all of them in Frankfurt. Two former Shearman partners say that the German practice was always too small to be credible as a full-service player, but the firm’s U.S. management refused to bankroll any additional expansion, and partners in Düsseldorf and Munich were ultimately told that they either had to move to Frankfurt or leave the firm.

“They were crystal clear; there was no money to invest,” says one former Shearman partner. “German management had no choice but to downsize.”

Shearman’s German managing partner Thomas König denies that the decision to close the firm’s Düsseldorf and Munich offices was imposed by management in the United States, insisting that it was a “self-engineered” move. Closing the offices was “a very emotional decision and took a lot of courage,” he says, adding that the firm’s German strategy is now “much more focused.” König says that Shearman is no longer targeting domestic German work, and will only cover areas such as intellectual property, labor and environment as transactional support practices. The firm’s intention is now to focus on cross-border deal work in corporate, private equity, capital markets and banking, he adds.

“We had to think about reputational issues. Closing offices could indicate some weakness,” König says. “But having three offices in a relatively small and overlawyered country, even one as decentralized as Germany, just wasn’t efficient. We did not get the impression that to build and maintain a relationship with a client in Germany, you have to be five minutes down the road from them.”

Most of the partners interviewed for this story agreed with him. Clifford Chance manages to be a long-standing adviser to Germany’s largest corporation, automaker Volkswagen AG, despite not having an office in Volkswagen’s hometown of Wolfsburg. Similarly, Freshfields Bruckhaus Deringer regularly acts for Stuttgart-based Porsche Automobil Holding SE without having a presence in the city.

“With firms coming under increased pressure on rates, at some point that will inevitably lead to them reviewing their strategies to be as efficient as possible,” König adds. “We believe the German market will look very different in a few years.”

Shearman is now one of 18 Global 100 firms to have just one office in Germany. Of those, 11 are based in Frankfurt. Most are firms with a recognized strength in finance and securities, such as Paul Hastings, Sidley Austin and Sullivan & Cromwell. Frankfurt is also the sole continental European base for both Bingham McCutchen and Kaye Scholer. Bingham, which launched in Frankfurt in 2010 with the hire of restructuring partner Jan Bayer from independent German firm Broich Bezzenberger, has since acted for creditors in a number of high-profile restructurings in Germany, such as those of building materials manufacturer The Monier Group and auto parts maker Schefenacker. Kaye Scholer’s 22-lawyer Frankfurt outpost, which opened in 2003 following its hire of Harald Rieger, the former general counsel of Metallgesellschaft AG, a key client of the firm, is now its largest office outside the U.S.

“As an international firm, the importance of being in Frankfurt is totally clear,” says Klaus Riehmer, a corporate partner in the Frankfurt office of Cleary Gottlieb Steen & Hamilton. “The only question is whether you need to go anywhere else.”

After Frankfurt, Munich is comfortably the second most popular German city among the Global 100, with 27 offices and almost 900 lawyers. A key business hub for the southern regions of the country, Munich is mainly targeted by law firms for access to its thriving technology, life sciences, and private equity communities. Christoph Küppers, regional managing partner for continental Europe at Hogan Lovells, which has four offices in Germany, says Munich is currently “the most prosperous business town in Germany.”

“Any law firm that hasn’t been successful in Munich over the past five years has been doing something wrong,” he adds.

Chicago-based Kirkland & Ellis, which is known for its strength in private equity, has its sole German office in Munich. In 2004, the firm launched the base—only its second in Europe, after London—with the hire of senior Clifford Chance private equity partner Volker Kullmann, to service key client Bain Capital, whose German operations are based in Munich. The firm recently advised Dutch private equity firm Gilde Buy Out Partners—a regular client of Kirkland’s Frankfurt office—on its sale of German cook-and-freeze product provider Hofmann Menü-Manufaktur GmbH.

As home to both the German and European patent offices, as well as the Bundespatentgericht, the German federal patent court, Munich is also the country’s main hub for intellectual property (and particularly patent) litigation ["Rocket Science," May 2013]. In fact, more than half of all patent litigation cases in Europe are heard before German courts, according to “The Handbook of European Intellectual Property Management.”

Munich is the sole international office of Boston-based IP specialist Fish & Richardson. Frank Peterreins, who heads the office, says the firm is currently handling more than 100 IP cases in Germany, including a series of European Patent Office oppositions relating to heart valve implants for medical device company The Boston Scientific Corporation against Edwards Lifesciences Corporation. The office files up to 500 European patent applications per year, Peterreins adds.

Mannheim had also previously been a key center for patent litigation in Germany. When business litigation powerhouse Quinn Emanuel Urquhart Oliver & Hedges came in 2010 to Germany, its first outpost in continental Europe, it launched in Mannheim by taking over the entire local office of Allen & Overy, led by patent litigator Marcus Grosch. But in early 2013, the European Union introduced new regulations that have seen the formation of unified patent courts in London, Paris and Munich ["One Patent to Rule Them All," May 2013]. These courts will handle all patent litigation relating to participating EU states (only Spain and Italy have opted out of the agreement), to promote greater efficiency and consistency.

It is perhaps unsurprising, then, that Quinn Emanuel has since opened in Munich, with Grosch relocating from Mannheim to head the office. (Quinn Emanuel also launched an office in Hamburg in 2012, although Grosch says the move was primarily designed to allow the firm to hire Allen & Overy IP litigator Nadine Hermann, who is based in the city.)

Six Global 100 firms have their only German offices in Munich, including Gibson, Dunn & Crutcher and Reed Smith, which launched its outpost in 2005 with an eight-lawyer team from Ernst & Young’s German legal affiliate, Luther Menold. Michael Pollack, Reed Smith’s global head of strategy, says the firm had initially considered both Frankfurt and Düsseldorf as locations for its Germany practice, but decided to go to Munich in order to hire the Luther Menold group, which specialized in financial services, M&A and technology, and which had a number of shared clients with Reed Smith, including U.S. real estate investment trust W. P. Carey Inc. (The lead partner, Stefan Kugler, now heads Reed Smith’s Munich office and is also a member of the firm’s global executive committee.)

“We were somewhat location-agnostic; the real key was the people,” Pollack says, adding that it was “highly likely” that Reed Smith would have opened in a different city if the team happened to be based there instead. (Rainer Magold, a finance partner at Milbank, Tweed, Hadley & McCloy’s Frankfurt office, says the same in relation to the firm’s Munich launch in 2004 and the three-partner private equity team it hired from Freshfields Bruckhaus Deringer.)

Pollack says that Reed Smith, which currently has 34 lawyers in Munich, sees no strategic need to be in more than one city in Germany. But he qualifies that by saying that, should the firm decide to expand significantly in Germany, it would likely look beyond the Munich legal market. (Only five Global 100 firms have more than 50 lawyers in Munich.) Reed Smith’s large number of financial services clients means that Frankfurt “makes the most sense,” he adds.

Düsseldorf is also proving increasingly attractive to the world’s top law firms. As part of the Rhine-Ruhr region, Germany’s industrial heartland, Düsseldorf is home to more of the DAX 30—the 30-largest listed German companies—than any other city in Germany. Among the clients based in the area are German utilities giants RWE AG and E.ON SE, chemical and pharmaceutical company Bayer AG, and conglomerate ThyssenKrupp AG. (German independent firm Hengeler Mueller is a long-standing adviser to both RWE and TyssenKrupp, and Freshfields is close to E.ON.) As such, Düsseldorf is one of the key markets for M&A in the country.

Global 100 firms currently have 14 offices in Düsseldorf, three of which were opened in the past two years. Recent entrants into the market include Latham, which opened last May after picking up a three-partner corporate team from Shearman. Latham’s Munich managing partner, Thomas Fox, says that the firm decided to launch in Düsseldorf to help it develop its German corporate practice. “We were already very strong in private equity, but we hadn’t been as successful targeting German corporates,” he says.

Interestingly, Düsseldorf has established itself as the main hub for the growing levels of Chinese and Japanese investment in Germany. In 2011 Mayer Brown replaced its offices in Cologne and Berlin with a new base in Düsseldorf as part of a revised strategy partly designed to target Asian clients. Last November, the firm advised Industrial and Commercial Bank of China (Asia) Limited on its €197.8 million ($273 million) financing of Aviation Industry Corporation of China (AVIC)’s joint acquisition of industrial plant builder KHD Humboldt Wedag International AG—the first takeover of a listed German company by a Chinese state-owned enterprise. (AVIC was represented on the deal by regular adviser Ashurst. Jones Day handled antitrust matters.) In another major piece of inbound investment from Asia, Hengeler was retained in 2012 to advise Chinese automotive and equipment manufacturing company Weichai Power Company Limited on its €738 million ($1.01 billion) investment in German forklift truck maker Kion Group AG—the largest Chinese investment in Germany to date. Its team on that deal was led by three M&A partners in Düsseldorf.

Jones Day, having launched in Düsseldorf in 2012, has been investing heavily in the city, last April recruiting corporate partner Ulrich Brauer from U.K. firm Simmons & Simmons as head of its German corporate and M&A practice. Jones Day now has 20 lawyers in Düsseldorf, and recently relocated antitrust partner Johannes Zöttl from Frankfurt to the city. Thanks to its proximity to the Bundeskartellamt, Germany’s Federal Cartel Office, less than 50 miles away in Bonn, Düsseldorf is the main center for antitrust work in Germany. Jones Day is currently representing a number of German automotive suppliers under investigation for suspected antitrust infringements by the European Commission and the German cartel office.

Once you go beyond Frankfurt, Munich and Düsseldorf, the picture becomes less clear. Firms are divided on the strategic relevance of having offices in cities such as Berlin and Hamburg.

The German capital of Berlin is home to 13 offices of Global 100 firms—only one fewer than Düsseldorf—but with an average of 31 lawyers each, those offices are the smallest of any major law firm center in Germany. (The offices of Global 100 law firms in Frankfurt and Düsseldorf have more than 40 lawyers on average, by comparison.)

And where Frankfurt, Munich and Düsseldorf have largely seen an influx of international firms in recent years, some have turned their backs on Berlin—the most recent being King & Wood Mallesons SJ Berwin.The majority of the 27 lawyers interviewed for this article pointed to Berlin’s lack of corporate or financial institutions as the major hurdle for international firms contemplating practicing in the city. Berlin’s last DAX 30 member, pharmaceutical company Schering, was taken over by Bayer in a 2006 deal that spawned roles for Latham & Watkins, Hengeler, and Linklaters. The city is now home to just one major listed company—multimedia company Axel Springer SE, which has worked with Hengeler, Milbank and Shearman, among others.

“Berlin as a legal market is not in existence; there is basically no industry,” says Joachim Schütze, Düsseldorf managing partner at Clifford Chance, which closed its Berlin office in 2004. “It is not possible for a big law firm to make good money in Berlin.”

Hogan Lovells’ Küppers agrees, as well he might, having effectively overseen the closure of Berlin offices on two separate occasions. Lovells, the legacy London-based practice that combined with U.S. firm Hogan & Hartson in 2010, had closed its Berlin office in 2007, but Küppers once again found himself managing a Berlin practice as a result of the tie-up with Hogan, which had its own office in the city. That ended when the entire Berlin office decamped to Morrison & Foerster last September. Küppers says the profitability of Hogan Lovells’ German practice has “increased amazingly” following the departure of its Berlin base, though he declined to provide specific numbers.

The Berlin office is Morrison & Foerster’s first in Germany, making MoFo only the fifth Global 100 firm to choose Berlin for its entry in the country, after Dentons, K&L Gates, Squire Sanders and Wilmer Cutler Pickering Hale and Dorr. The former Hogan Lovells team represents a number of major media organizations, including News Corporation and Sky Deutschland AG, and recently advised Axel Springer on its acquisition of German TV news channel N24 Media GmbH. MoFo chair Larren Nashelsky says the firm had also considered Munich because of its strength in IP litigation, adding that the Bavarian city “remains a possibility” for a potential second office.

After its longtime alliance with leading independent German firm Gleiss broke down in 2011, Herbert Smith Freehills recently reentered the German market with a dual launch in Berlin and Frankfurt. Two sources with knowledge of the situation said that Herbert Smith originally intended to open in Frankfurt, Düsseldorf and Munich, but that the firm struggled to recruit in those cities. According to these sources, it only opened in Berlin, a city not originally of interest, to hire Gleiss corporate partner Ralf Thaeter, who was based there and unwilling to move to Frankfurt. (Prior to joining Herbert Smith, M&A specialist Thaeter acted for clients such as The Federal Republic of Germany and U.K. leisure group TUI Travel PLC.)

Allen Hanen, Herbert Smith’s Europe, Middle East and Africa managing partner, concedes that the Berlin launch was “opportunistic,” but says the city “became attractive” after discussions with Thaeter. “Ralf provided us with a better understanding of what Berlin had to offer,” he says. “We have a strong energy and projects practice, and Berlin has a number of energy companies. It turned out to be a good second office for us.”

International law firms have a smattering of offices elsewhere in Germany, such as the historic shipping, publishing and fashion industry hub of Hamburg, or Cologne, which most firms have overlooked in favor of neighboring Düsseldorf. But the majority of those outposts are remnants of mergers and lateral hires, rather than a reflection of proactive strategy. Freshfields and Latham both have more than 70 lawyers in Hamburg, for example, but each as a result of mergers with Hamburg-based firms (Freshfields with Bruckhaus Westrick Heller Löber in 2000; Latham with Schön Nolte in 2001). “German lawyers tend to be very entrenched and settled in their cities,” says Tamara Cohen, a legal recruiter based in Munich. “In the end, if a firm really wants a group of partners, they may have to open an office to get them.”

Its three-way merger with Bruckhaus and fellow German firm Deringer Tessin Herrmann & Sedemund in 2000 left Freshfields one of the most sprawling of the international firms in Germany, with offices in six German cities. All of its offices are doing well, and the firm has no plans to change its current configuration in Germany, says Frankfurt corporate partner Christoph von Bulow. But, he admits, “we look at [our German network] from time to time and ask whether it continues to make sense. If we were to start from scratch, it is unlikely we would have six offices, and unlikely we would be in both Düsseldorf and Cologne.”

In future, expect international firms to increasingly center their German practices on a mixture of Frankfurt, Munich and Düsseldorf offices. While some firms may open bases in cities such as Berlin and Hamburg to hire resident partners or teams, it is unlikely that many will choose to do so for purely strategic reasons.

“When we first started looking [at Germany] in the mid-2000s, the idea was that you couldn’t do work for a client in an area unless you had an office in that city,” says MoFo’s Nashelsky. “I don’t think that’s gone, but the need to be in every single city has eased up. Clients are less focused on geography than they ever have been. They want the best lawyers with the right expertise, wherever they are located.”