Emerging tech companies, oodles of private equity, BMW – there are plenty of reasons firms are moving to Munich, writes Richard Tromans
“I keep telling the senior partner there is more to Germany than just Frankfurt but he doesn’t believe me,” says one German partner of her Anglo-Saxon management back in London.
But when it comes to Germany, why should any English senior partner care about anything other than the country’s banking and capital markets centre? City firms would never open a Birmingham office just to be close to a Midlands client and much of the big firms’ international expansion has been limited to major financial centres such as New York, London, Frankfurt, Hong Kong and Singapore.
In most countries, this strategy has worked well. But Germany is unlike any other European jurisdiction. Because of its patchwork history – and federal constitution – regional loyalty has remained a dominant force far longer than in other European countries. More practically, as one Munich lawyer puts it: “A Bavarian would never go to Frankfurt for advice.”
These two factors mean that, globalisation or not, many of Germany’s largest companies, both public and the family owned mittelstand remain wedded to their respective regions – and often like to outsource their professional services locally too.
After the merger frenzy of the past two years, many magic circle firms now find themselves with more German regional offices than they know what to do with. Luckily, some of these centres beyond Frankfurt have great potential, given carefully planned development.
More firms have opened in Munich in the last six months than in any other city in Europe, five of them Anglo-Saxon and one German.
Clearly, some lawyers see a strong need to be in the Bavarian capital, and it is not just the pleasant Englischer Garten or the homely Muenchen Cricket Club that draws them there.
Munich is also the home of BMW, Siemens, MAN, Allianz and HypoVereinsbank, not to mention dozens of private equity funds and emerging technology companies. Outside of Frankfurt, which has become for City lawyers the de facto capital of Germany, the city with the greatest potential for success is Munich.
Although, Munich was a relative backwater 10 years ago compared with the corporate activity of the Ruhr Valley, it is now home to Germany’s emerging technology sector. Bavaria’s elegant capital is attractive to young minds eager to put their energy into start-up companies and the German patent office and some of country’s best patent firms, such as Bardehle Pagenberg, are based in Munich. It is estimated that there are as many as 300 biotech start-ups in the city.
Many of the 260 venture capital and private equity funds in Germany also have bases in Munich. They range from adventurous Californian funds such as Robertson Stephens to incubators such as Gorilla Park.
The Bavarian government also offers parallel funding for Munich start-ups, matching investments from venture capitalists to new companies in a bid to keep the tech sector cash rich. And Munich’s start-up sector is not characterised by business-to-consumer models that died off when the tech bubble burst last year. Most are biotech and IT-based projects working on cutting-edge products rather than internet-based services.
Finally, according to local lawyers, the local tax authorities adopt a ‘hands-off’ approach to innovative tax planning structures for start-ups and funds.
Getting in close to these companies and funds is important. Both fund managers and young scientists-turned-entrepreneurs want their lawyers to be around the corner, rather than in another of the laender 200 miles away in Frankfurt.
Consequently, firms such as Ashurst Morris Crisp, SJ Berwin and US joint venture Brobeck Hale and Dorr have all opened Munich offices in the last nine months, Ashursts and SJ Berwin to advise the private equity providers and Brobecks to advise start-up companies aiming to go to IPO on the Neuer Markt, as well as venture capital funds such as Robertson Stephens.
Last year saw an IPO bonanza in Germany and, while there has inevitably been a downturn this year, according to SJ Berwin Munich-based partner Christopher Brenner the outlook is still good. “Fundraising has grown, even during the darkest times of this year,” he says.
He adds that although the “frenzy” of funding is over there is a lot interesting work to be done, with funds trying to sell off their investments in some start-ups which, in turn, require more complex financing to keep them running without a rapid IPO.
Brenner, whose firm advises German Equity Partners, Atlas Ventures and Dresdner Kleinwort Benson Emerging Europe to name a few, says the atmosphere since the boom and bust is now one of better management coupled with fewer but larger investments. He adds that there is plenty of money available in the funds just waiting to be spent.
When the tech market upturn will come no one is sure, but these pioneers are best placed to reap the rewards. However, Brobecks partners are not totally starry-eyed and admit they have been hurt a little more than most because of the dearth of IPOs this year. The firm’s Munich partners expect a 30% shortfall on planned turnover for 2001.
Brobecks’ despondency is largely because it acts for a larger proportion of start-up companies as opposed to the funds. The major funds still need top-end advice on how to use their millions, while the small companies are simply waiting for their next round of funding and are not big enough on their own to generate a heavy work flow.
The sudden rise in private equity was not overlooked by local firms either. Munich-based Haarmann Hemmelrath, a firm built on entrepreneurial work for mittelstand clients with a heavily tax-driven practice, has made much of its close links to the venture capital market. It recorded per partner profits of around dm1.3m (£407,000) last year. That might be unimpressive to the City’s finest but, in Germany, making more than £350,000 is top-tier earnings and proof of the potential in the domestic market.
Another Munich-based firm is Beiten Burkhardt Mittl & Wegener, which along with Haarmanns is one of the few large German firms not to have merged with the Anglo-Saxons. Beitens has also joined the start-up bandwagon, although its roots are in its Bavarian mittelstand client base.
But, by its own admission, Beitens does not get as much major work from the Bavarian heavy hitters such as BMW and Siemens as
it would like. Both companies have large
in-house legal teams and only farm out specialist work on a limited case-by-case basis.
But come the predicted corporate boom next year, the potential volume and complexity of the associated legal work will overwhelm these departments and already a number of Anglo-Saxon firms are getting into position for the top-tier work.
One such firm is Norton Rose which, after taking a slice out of now-defunct German firm Gaedertz this year, has offices in Cologne, Frankfurt and Munich. The Bavarian office is the smallest of the three, but Frankfurt-based partner Simon Cox, the main BMW contact partner for Norton Rose, will soon be based in Munich to build on the relationship.
This new corporate rush is slated to begin 1 January, 2002 when the German Government cuts corporate tax on disposal of assets to zero. This promises to kickstart the M&A boom that so many City firms are banking on to save them from the effects of the US slowdown.
Munich’s mix of new money, technology, profitable mittelstand and major players such as Siemens and HypoVereinsbank should produce a rich seam of corporate work.
It is perhaps no surprise then that Shearman & Sterling is opening an office in Munich this summer, while Altheimer & Gray has also said it wants an office in the city.
Other UK firms with bases in Munich include Linklaters, Clifford Chance and Freshfields Bruckhaus Deringer, which is building up its corporate practice after moving into a new and much larger office with two floors held in reserve to grow into. Corporate partner Peter Nussbaum, the force behind setting up the Munich office, says the city has been underrated until now.
“People never looked south because there was too much business elsewhere in Germany,” Nussbaum says. But when four partners decided to leave Boesebeck Droste ahead of its merger in 2000 with Lovells, Freshfields leapt at the opportunity to snap them up. The Munich office has already headed into the private equity sector with some success and has advised on a number of dm1bn-plus (£330m-plus) fund deals.
But it is corporate work that is its main target. “What is most important here is M&A, that is why this place is attractive,” Nussbaum says.
Munich is already Germany’s Silicon Valley. But it also has its fair share of multinational and mittelstand companies. There is certainly more to Germany than Frankfurt.
