When competition is tight it is lawyer’s fees that come under most pressure.
Germany is one of the most highly contested jurisdictions in the market, but its fees have historically been lower than those charged in the UK and the US. With the market now full of firms headquartered in either London or New York, attention has turned to the effect this is having on fees in Germany. Are firms under pressure to revise their pricing structures?
The international firms are said to have been under most pressure. Perhaps a reflection of this is that none of the magic circle firms in the region agreed to take part in this report. They must walk a fine line between charging too much locally and adhering to policies set by internal management. And they must be able to explain their choices to their US and UK counterparts charging much higher rates on similar pieces of work.
Meanwhile, the independents are able to control their own pricing structures having seen much change in the past 10 years. Since the financial crisis of 2008 many German companies have been unwilling to agree to the higher fees charged by the international firms, especially on mid-level work. But they are prepared to stump up the cash on big-ticket and high-profile mandates, leading to stiff competition between the international giants and established independents.
Q: Compared with other countries, fees for legal services in Germany are moderate. Why?
Ritesh Rajani, partner, Graf von Westphalen: A large number of German clients are mid-cap. Many German law firms have advised these clients for decades at moderate rates. Most international firms entered the German legal market only from the 1990s.
While some large German corporates and private equity/venture capital funds were willing to pay the higher fees of such international firms, many German mid-cap clients were not able and/or willing to accept such rates. In addition, there is considerable price competition in the German legal market. Recent years have seen a rising number of spin-off firms that have small overheads and can therefore offer good quality legal advice at lower rates.
Elisabeth Lepique, co-managing partner, Luther: The cost-awareness of German clients makes it harder to meet internal profitability standards. For example, German clients tend to rely more on legal panels. Particularly, large corporations such as those in the DAX30 [the German stock index] are reducing their number of advisers because of their strong cost-awareness.
“The cost-awareness of German clients makes it hard to meet internal profitability standards” Elisabeth Lepique
Second, in the US it is normal that companies involve their attorney in every project, no matter what. Germany is traditionally characterised by family-owned businesses [the ‘Mittelstand’], and family entrepreneurs don’t ask for legal support at every stage. They are therefore not accustomed to being confronted with big bills.
Another reason for the moderate fee level is the strong competition in the legal market in this country. In Germany we find competition between legal advisers and tax advisers, and also between full-service law firms and a wide range of boutique-type law firms.
“The value-for-money equation looks much better because top German firms are very sophisticated” Alexander Ritvay
Alexander Ritvay, co-managing partner, Noerr: Actually, London and New York are the outliers. Obviously, these markets have different cost structures. Legal fees in Germany at the upper end of the market are fair-to-average in the developed world. But the value-for-money equation looks much better because the top German firms are very sophisticated.
Q: What would need to happen in the market for law firms to increase their fees? Do you feel under pressure?
Rajani: In Germany law firms were generally able to charge higher fees prior to the financial crisis, in particular for big-ticket business.
If the economy stabilises and larger transactions happen more frequently there’s a good chance we’ll be able to charge higher rates again. While we obviously face competition on the German legal market, we as an independent German firm do not feel such pressure as our international competitors.
Unlike the UK and US firms operating in Germany who, in principle, need to follow the guidelines set by their international management, we are free to design our own fee structure.
Lepique: In German companies buyers, not the legal departments, negotiate prices for legal services. As a result, law firms must act like any other service provider – pricing can only be improved if the legal work can increase turnover and/or reduce costs. Of course, law firms in Germany are under pressure. This is not a growth market. We have a competitive situation here.
Ritvay: There is more pressure on fees now everywhere. But clients are still prepared to reward added-value and pay appropriate fees for high-quality advice. And naturally, different market segments have different price tags.
Q: Do you see Germany’s moderate fees as an advantage to your operating model?
Rajani: Being able to offer moderate fees to our clients has enabled us to maintain relationships on a long-term basis, in particular with our mid-cap clients. Had we increased our fees significantly there would have been a definite risk of either losing such clients to smaller competitors or the clients deciding to deal with their matters without any [external] legal assistance. A clear advantage of Germany’s moderate fee structure is that – unlike our colleagues in the UK and US who often complain about their clients asking for fixed-fee arrangements – we can mostly charge our services on an hourly basis.
“Being able to offer moderate fees to our clients has enabled us to maintain relationships on a long-term basis” Ritesh Rajani
Lepique: Yes of course. The basis for this is a personnel structure that allows flexibility. We have a good mix of partners, counsel and senior associates in the firm so we can customise fee structures to the mandates more freely.
Ritvay: The German legal market is competitive and nobody can sidestep the market conditions. So for domestic work there is no advantage. But in cross-border matters we lead on we are able to offer competitive prices compared with some of the global firms who are less flexible with their mandatory ratecards.
Q: How are the international firms coping with these fee variations across multiple jurisdictions?
Rajani: It is a challenging situation for international law firms, in particular for the UK and US firms operating in Germany. On the one hand they need to meet the revenue targets set globally for all partners. On the other they need to offer a fee structure that allows them to attract business and maintain relationships in the given economic environment.
A key to success is to secure a client base that is willing to pay international rates for legal services in Germany, such as listed companies, private equity and venture capital funds and foreign corporates who are used to paying higher fees.
Lepique: They focus on clients who accept their high fees, as they work with clients from the UK or the US. These clients are used to prices as in London, so the international law firms do not necessarily have to adjust to the German fee level.
The market is of great interest to many UK and US-headquartered law firms, but not all
In the past year a number of firms have opened in Germany, marking either their expansion in the country or their debut in the market. K&L Gates opened its third German office last summer for example, while Clyde & Co launched its first base in the region after picking up a five-lawyer team from Noerr.
The competitive nature of the market, in addition to its position as one of the Europe’s most important economic hubs, means Germany plays an important part in many law firms’ international strategies. However, the region has also caused headaches for firms such as Clifford Chance, Freshfields Bruckhaus Deringer and Olswang, who have all closed offices or asked people to leave in the past two years.
The missing firms
While many firms have announced new developments in Germany in the past 12 months, others still have no official base in the country. Top US firms without a German home include Cooley, Covington & Burling, Davis Polk & Wardwell and Simpson Thacher & Bartlett, and UK-headquartered firms without no German presence include Addleshaw Goddard, DAC Beachcroft and Holman Fenwick Willan.
For some, this could change in the next year. Cooley is understood to be searching for a second European base in Munich to expand its footprint outside London. Boston partner Michael McGrail has already been relocated to Frankfurt and tasked with building up the firm’s capability through group lateral hires, with a base planned in Munich sometime during 2017.
“Life sciences and data privacy are issues driven by Germany, and it’s a jurisdiction you can’t ignore”
Meanwhile, Addleshaw Goddard is understood to be in talks to merge with full-service German firm Luther. Luther has 10 offices in Germany plus five international offices in Brussels, London, Luxembourg, Singapore and Shanghai. Globally it has 283 fee-earners, of whom 72 are equity partners.
Addleshaws declined to comment on the tie-up, although one source close to the firm says there is a chance the two firms could opt for an exclusive alliance over a merger. A merger would add around €108m (£92m) to Addleshaws’ top line according to the German firm’s 2014/15 financial results.
On the other hand, physically being in Germany is not a focus for firms such as Covington and Davis Polk. The latter closed in Frankfurt in 2009 after then-partner Patrick Kenadjian retired. He is now a senior counsel at the firm and is currently an adjunct professor at Goethe University.
“Davis Polk had a partner in the office and a handful of associates,” explains a source. “But the strategy has changed since then and the firm now focuses on London, Hong Kong and New York – the major capital markets centres. In other jurisdictions, it’s very much on an ad hoc basis.”
Davis Polk, in fact ,already has a number of German-speaking partners in London, with John Banes working in Frankfurt between 2000 and 2002. He has acted on corporate deals for Germany-based companies such as Deutsche Bank, Schaeffler and Siemens, also giving him an ‘in’ into European institutions such as ABN Amro and DnB NOR. Fellow German speaker Leo Borchadt was also promoted to the firm’s partnership last year and is based in London.
Covington does not place strategic importance on Germany, instead having just one Continental European office, in Brussels.
“We have colleagues in Brussels who look hard at Germany and are active in the region,” says one partner. “It’s an interesting jurisdiction and there’s plenty happening in life sciences and data privacy. These are issues driven by Germany and it’s a jurisdiction you can’t ignore.”
The Bayer-Monsanto deal last year was one of the biggest ever seen in the region, worth £54bn
Despite being of vital importance to the European economy, Germany is not an essential part of all international firms’ strategies. But while some firms continue to pursue growth in one of the world’s most competitive legal markets, others believe that non-German based partners can also win mandates by maintaining close links with the country.
International firms lead in M&A
The value of worldwide M&A deals last year dropped 26 per cent below 2015’s figure but the German market was boosted by one of the region’s largest M&A transactions ever, as pharmaceuticals and life sciences company Bayer announced it would take over agricultural giant Monsanto in a deal worth $66bn (£54.3bn).
The deal saw multiple firms win roles, with Bayer handing mandates to Allen & Overy (A&O), Hogan Lovells, Luthra & Luthra, Stikeman Elliott and Sullivan & Cromwell. Clifford Chance, Shearman & Sterling and Linklaters worked with the financial advisers.
US firms, as opposed to local firms, also led the way on the other side as Monsanto sought counsel from Wachtell Lipton Rosen & Katz. Paul Weiss Rifkind Wharton & Garrison acted as antitrust counsel, while Cravath Swaine & Moore and Morrison & Foerster advised the banks. Debevoise & Plimpton worked with the shareholder group involved in the transaction.
The Bayer-Monsanto mega-deal pushed many firms up the M&A table for deals with German involvement. For Indian firm Luthra & Luthra the Bayer transaction was the only Germany-related deal it worked on in 2016, but this saw it take 15th place in the table.
The listing shows the dominance of US and international firms over domestic ones.
Linklaters is the top firm, according to Thomson Reuters’ deal data, having worked on 51 transactions last year with a value of $137bn. These include transactions for industrial group Thyssenkrupp in which it acquired the minority interests of a Brazilian steel mill from Vale. Longstanding client Deutsche Börse continues to turn to Linklaters on corporate deals, particularly as its merger with the London Stock Exchange nears completion. The magic circle firm also won roles on Panasonic’s purchase of shares in German software company OpenSynergy and gas grid Thyssengas’ sale to DIF and EDF.
Sullivan & Cromwell and Cravath take second and third positions owing to big roles on the Bayer-Monsanto transaction. Compared with Linklaters’ 51 deals in 2016, the US firms worked on just 10 and three deals respectively. In general, the magic circle firms took on the largest amount of deals by quantity, with Clifford Chance winning roles on 65 transactions and Freshfields working on 76 in 2016. A&O scored mandates on just 37 deals but still takes seventh place in the table, working on $68bn worth of transactions.
Hengeler Mueller is the only independent German firm to make it onto the table. Slaughter and May’s best friend acted on 67 deals over 2016 worth a total of $67.7bn. The firm won a big role in Praxair’s $35bn purchase of German industrial company Linde, as well as Amundi Real Estate’s acquisition of a Frankfurt building owned by JP Morgan Asset Management. Hengeler worked with the latter company on this transaction.
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