To merge or not to merge

As continental Europe becomes a growing market for private equity services the big UK and US-based law firms are eyeing up opportunities and looking at ways to build up their capacity. But expansion within Europe is not always straightforward and firms must often weigh up the pros and cons of different approaches, notably alliance or merger compared with organic growth.

Many of the leading Anglo-Saxon firms now have mergers in place with European partners while others are still looking. Some, on the other hand, have opted for a strategy of growing their own teams in particular markets.

In southern Europe and France, for example, some Anglo lawyers argue that mergers are difficult because of the wide cultural gap and because firms are often determined to stay independent. The German market, on the other hand, is more open to overtures from Anglo firms and there is usually a closer cultural fit. These factors, combined with the huge economic importance of Germany in corporate law, account for the large number of mergers, often in effect take-overs, involving UK/US firms and German partnerships in recent years.

As Alan Greenough, a partner at London firm Pinsent Curtis Biddle, declares: “You look at the German legal profession today and in effect it’s being taken over by UK and US firms. You couldn’t imagine the same thing happening in France.”

At Clifford Chance, the world’s largest law firm following the merger with the US’s Rogers & Wells and Germany’s Punder last year, there has been a mixed approach to European expansion. Private equity partner David Walker says that after its UK merger in the 1980s, Clifford Chance decided to build up organically a strong European presence. This presence has been reinforced by the acquisition of Punder, Germany’s third largest law firm.

“We have strong private equity expertise in London, Paris, Frankfurt and all over Europe,” says Walker, adding that other leading Anglo-Saxon firms are now trying to catch up by combining organic growth and acquisitions. American firms have been slower than the British in expanding their European capacity, he argues: “They’ve been in London for a long while but not the rest of Europe but now we’re seeing a number of firms looking for mergers in markets like Germany, Spain, Italy and Holland.”

The incentive for building European teams is the growing demand for private equity and venture capital legal services on the continent. Germany is the jewel in the crown. It is

by far the largest potential market for private equity and a change in tax law this year is expected to generate more buyouts. Historically the Dutch market has been relatively busy and there is a growing focus on France, Italy and Spain.

It is natural for the Anglo-Saxon firms to seek to exploit this growth as private equity and venture capital deals reflect closely a US-UK business model, which means it

is the American and British lawyers who generally have the expertise and experience in helping put together deals. Of course, technical knowledge is not enough when operating in different jurisdictions which is why the Anglo firms need domestic lawyers with the local knowledge and contacts, as well as the cultural fit to deal with domestic clients.

Jonathan Blake, head of private equity at SJ Berwin, says the firm has adopted a mixed approach of merger and building up local teams. It merged with a German firm a few years ago but more recently has adopted aggressive “hot team” tactics, such as hiring a team of private equity lawyers from international firm Baker & McKenzie’s Munich office a few months ago to set up its own office in the city.

The London firm now has offices in Frankfurt, Berlin, Brussels, Madrid and a recently opened office in Paris. The firm specialises in private equity, M&A and tax. “Because of our approach there are few existing firms that are specialised in the way we’d like so we’ve often gone for building up teams, whether they are already in existing firms or not,” says Blake.

He says that there can be many obstacles to overcome in achieving mergers and that alliances also have their drawbacks. Many European firms fear being swallowed up by a large US or UK firm and therefore may prefer an alliance. The advantages are that less work is needed on integrating cultures and working practices and there is future flexibility. If an alliance does not succeed it is relatively easy to find a new partner, and there is always the option of developing an alliance into full merger.

But most Anglo firms are lukewarm on alliances and would prefer outright merger, simply because that means everyone is pulling in the same direction and clients can expect consistent treatment regardless of the jurisdiction.

“An alliance is basically sharing some costs and pooling certain resources but ultimately maintaining two management systems and profit pots so you don’t get people working towards a common goal and supporting each other,” says Marco Compagnoni, a partner at Lovells.

Lovells takes a pragmatic approach, he says, and will opt for merger in those countries where merger is most appropriate and for assembling new teams in jurisdictions where finding a merger partner is difficult.

When it comes to the role of alliances, many lawyers are not that keen, arguing that problems can emerge over the sharing of information. Marwan Al-Turki, a partner at Baker & McKenzie, says: “When I worked for a firm that had an alliance with a US firm they were always asking for information about our new products. But I was cautious about telling them too much because then they could just go off and use those products themselves.”

Others, however, argue the benefits of alliances. Mid-market London firm Pinsent Curtis Biddle announced last November an alliance with Sweden’s Magnusson Wahlin to take advantage of Sweden’s growing technology market.

Pinsents partner Alan Greenough says the firm is simply not big enough to consider mergers across Europe but that the alliance with Magnusson offers key benefits, including the fact that both firms can keep their independence while they see how the alliance develops. It could, over a period of five years or so, turn into a merger if that is what both firms want, says Greenough. “If it does it will be the result of a long-established relationship and both partners will know each other well.”

Alliances can succeed if they are properly handled, he says, noting that the agreement with Magnusson involves lawyer exchanges, some joint marketing and including each other on email systems: “It’s an exclusive arrangement in which we’re committed to them in the UK and them to us in Sweden.”

Pinsents is now looking for a German partner. “We’d like to do something similar in Germany if we can because we can see good chances for synergy between the German and Scandinavian markets,” says Greenough. The German market is key for most corporate law firms. “It’s the first place in Europe, after the UK, that US companies want to go to and a lot of our clients from the UK have operations there or private equity funds.”

A major boost in private equity transactions is expected in the coming years in Germany as the medium-sized family-owned mittelstands begin to be sold off, adds Greenough.

But Anglo firms seeking to build a German presence, or presence in another European market, through merger need to recognise the challenges. “The big downside of mergers is the time it can take to integrate cultures,” says SJ Berwin’s Blake, adding that there are usually cultural differences between two English firms, never mind an English and continental European firm.

“Cultural differences include how responsive people are, how quickly they get back to you, whether there’s a can do’ culture or one in which everyone complains,” he says.

Among the US firms reportedly seeking alliances or mergers in Europe are Skadden Arps and Meyer Brown Platt and the US’s Coudert Brothers recently picked up a German firm. There are also UK firms on the look-out. Norton Rose recently announced a merger with the Cologne office of Gaedertz, while US firm Latham & Watkins acquired Gaedertz’s Hamburg office.

Much of the merger focus for Anglo firms has been on Germany, due partly to the importance of the German market but also a belief that northern European firms tend to be a closer cultural fit for US or UK firms.

For example, London firm Lovell White Durrant merged with Germany’s Boesebeck Droste last year to create the fourth largest law firm in Europe and recently merged with a Dutch firm. But Lovells, as the firm is now known, has not sought merger partners in some countries where it wants to expand.

In some countries, such as Italy, it has gone for a hot team’ approach of bringing in people from other firms to assemble a private equity team. “In Italy it’s nigh on impossible to find the right sort of firm to merge with, both in terms of finding a firm that has the right expertise and would make a cultural fit,” says Lovells partner Marco Compagnoni.

He says the firm is still looking to expand elsewhere in Europe but whether it adopts the merger model or the Italian approach will depend on local conditions. But compared with alliances Compagnoni says he is convinced that, where possible, they are the best way forward.

In a merger you have a unified management structure operating across firms and borders, he says, and unified economies within the firm so that there is “a single pot that all the partners eat out of in terms of profits”. That means if, say, there are problems in Germany or France it is a matter of concern to all partners as all will be affected by below-par performance in any one part of the network.

Similarly, there is an incentive for staff in, say, London to support colleagues elsewhere in Europe: “It’s in all our interests to make sure deals are run effectively and that clients are followed up and treated well,” says Compagnoni.

But Anglo lawyers say integrating French or southern European cultures into a UK or US firm is extremely difficult. “The way senior lawyers are used to working in these countries and how they see themselves is very different to the UK or US approach,” says one London lawyer. “They can be very self-important and are often not used to working in a team like the British or American lawyers.”

But major cultural differences can also surface in mergers with northern European firms, particularly if the deal ends up feeling like a take-over by London or New York.

A partner in a boutique Hamburg firm specialising in private equity, who asks not to be named, says:

“Most of the big mergers involving German firms have effectively been takeovers and the perception of the German lawyers is that most things are run from London or Chicago or wherever.”

One problem the Anglo firms have encountered is in finding enough partnerships for high-flyers on the continent. Many young German lawyers that joined UK-controlled firms have become disillusioned because they expected the route to partnership to be much quicker, says the Hamburg lawyer. “Freshfields Bruckhaus Deringer recently disappointed a lot of people who were expecting to be made partner,” he says.

Some firms have chosen organic growth over mergers or alliances. For example, Baker & McKenzie, whose administrative head office is in Chicago but which regards itself as an international firm, has built up offices in Europe’s main markets.

The firm has done one European merger, in Madrid, but generally relied on building up its own offices, says partner Marwan Al-Turki. “At 50 years old we’re a relatively young law firm and we see ourselves as an international firm where each office has a large degree of autonomy,” he says.

This has allowed centres of private equity expertise to be developed in markets such as the UK, Germany and Benelux. “In Germany, for example, our clients include 3i and Apax and in London we deal with all the corporate venturing work of Compaq, Cisco Systems and Sony,” he says, adding that the challenge has been to put together these offices that have always been strong individually.

“One of our problems has been that many people don’t know about us, which is probably our fault for not marketing ourselves in a co-ordinated way but that’s changing,” says Al-Turki. He argues that big mergers often fail to achieve the hoped-for results because of cultural misfits and because often key lawyers leave rather than be part of a firm dominated by London or Chicago. “Because we have an international culture we don’t have those problems of cultural assimilation.”

SJ Berwin’s Jonathan Blake argues that building teams avoids many of the cultural challenges inherent in mergers: “We’re building up teams of individuals who are well-known in their own country and are people we’ve been working with for many years, while they were still in other firms.

“You get big problems when there’s a sudden merger between two groups of people who may not even have heard of each other a few months earlier.”

On the merger issue, Baker & McKenzie’s Al-Turki notes that continental European lawyers are often more individualist and find it difficult to operate in a merger environment. But they are able to perform well in offices that enjoy significant autonomy, such as at B&M. While he accepts that there are advantages and disadvantages of alliances versus mergers, Al-Turki is a strong believer in the benefits of merged operations over alliances.

“Credibility is a big issue because, unless it’s a single firm, lawyers in different countries are not accountable to each other and may not be communicating, which has a clear consequence on the quality and consistency of advice given to clients.”

But if a merger is to be effective and the departure of key partners kept to a minimum there need to be real mutual benefits, argues Lovells’ Marco Compagnoni.

There are different merger models, he says, but the “London knows best” approach has drawbacks. “When we were going around Europe talking to people we found that our proposal of building a collaborative European firm, rather than a London firm with some bolt-on satellites, was eagerly received.

“When people in Germany or wherever feel everything they do is determined from London they feel they cannot develop their own domestic practice and are tempted to leave.”