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Source: The American Lawyer

Bavaria's Buyout Capital

Back in the mid-1990s, when Peter Nussbaum was a partner in the Hamburg office of Germany's Bruckhaus Westrick Heller Löber, he made a then-daring suggestion. Why not open an office in Munich, where many of Germany's largest corporations were based? The idea went nowhere at the time. "My colleagues said, 'That's ridiculous! There's one big firm there [Nörr Stiefenhofer Lutz], and they have all the connections and work,' " recalls Nussbaum, now a partner at Milbank, Tweed, Hadley & McCloy.

More than ten years after Nussbaum had that conversation with his former partners, large firms-either German or international-no longer think it's ridiculous to be in Munich. Frankfurt remains Germany's banking and finance capital and home to most firms' German headquarters. But an office in Munich has become a must-have for firms that want a piece of Germany's increasingly lucrative private equity market. In addition to German independents Gleiss Lutz and Hengeler Mueller, U.S. firms Skadden, Arps, Slate, Meagher & Flom; Milbank; Kirkland & Ellis; Latham & Watkins; and White & Case have set up shop here, most in small, highly focused outposts that are essentially private equity boutiques.

Now Nussbaum works out of an office located just off one of Munich's more fashionable shopping boulevards. He came to Munich when Bruckhaus eventually opened in the city in 2000 (just before its merger with Freshfields), and then moved to Milbank in 2004. "The arrival of the high-tech economy and then the buyout houses changed the [Munich] market in the later 1990s," he says. "There was a huge demand for legal services that the traditional Munich firms couldn't cover."

The demand has only increased. According to mergermarket limited, the value of buyouts involving a German target increased from ¤25.4 billion in 2005 to ¤30.1 billion last year. Munich is home to outposts of leading international private equity houses such as Apax Partners, Inc., Bain Capital, LLC, The Carlyle Group, Allianz Capital Partners GmbH (the buyout arm of the German insurer), and EQT Partners AB. Meanwhile, investment in the smaller, domestic buyout market is increasing, and last year Bavaria, with Munich as its largest city, attracted just over half of the ¤3.6 billion total, according to the German Private Equity and Venture Capital Association.

The rapid pace of dealmaking, combined with Munich's attractive quality of life, tends to create a law firm culture that is distinct from that found in Germany's other major cities. High-powered Munich attorneys, who often opt for an open-necked shirt over a tie, show something of the pragmatic Anglo American commercial approach to dealmaking: Just get the deal done. Typically, it's a work-hard, play-hard atmosphere. Volker Kullmann, the head of Kirkland's Munich office, often rewards his deal teams with weekends in the Alps after particularly drawn-out deals.

"People in Frankfurt think that we leave our desks at 2 p.m. on Friday and head to the mountains," says Skadden partner Bernd Mayer, with the smile of a man who knows he can be in the Alps in around an hour. "Of course, we do head to the mountains on a Friday-but that's in the evening."

The transformation of Munich's legal market is all the more remarkable because historically the city was seen as a closed shop. Despite being home to more companies listed on the DAX 30-the 30 largest companies listed on the German stock exchange-than any other German city, Munich was slow to attract the large German firms and international players. Even after 1989, when Germany changed the law prohibiting firms from practicing in more than one city, local firms Beiten Burkhardt and Nörr Stiefenhofer Lutz continued to dominate the Munich market. Munich's major corporations were also used to looking outside the city for advice. Germany's top corporate lawyers-such as Freshfields Bruckhaus Deringer's Axel Epe and Shearman & Sterling's Georg Thoma-have typically been found in Düsseldorf, close to the heavy industry of the Rhineland.

A wave of high-tech companies and foreign private equity houses began arriving in Munich in the late 1990s. Internet giant Inc. opted for Munich for its German headquarters, while Infineon Technologies AG, Germany's largest chip maker, is also headquartered in the city. The Bavarian government helped foster a business-friendly environment and a tax regime that appealed to venture capital and private equity funds looking to open in Germany. When state holdings were sold off in the 1990s, the Bavarian government also ensured that the proceeds were used to support the new venture capital business.

The strategy, if the buyout market is anything to go by, has paid off. Although Frankfurt, a base for Cinven Group Ltd., Permira Advisers LLP, and Advent International Corporation, lays claim to its fair share of private equity activity, Munich is still seen by most as Germany's buyout capital.

For the U.S. firms that have opened in the city, the dominant strategy has been to hire private equity and general corporate partners with a good following among the private equity houses and German corporations. Skadden, for instance, bet big on Bavaria when it opened in 2004 with a four-partner team from Baker & McKenzie-one of the largest lateral hires the firm has ever made-and it now has 15 attorneys based in Munich. Mayer and his fellow Munich corporate partners Walter Henle and Lutz Zimmer, plus Matthias Jaletzke in Frankfurt, brought with them a very Skadden-like corporate finance focus, as well as a roster of private equity and corporate clients that included ThyssenKrupp Steel AG, Siemens AG, and Apax Partners. Private equity partner Jaletzke was instrumental in introducing Apax to Skadden's New York office, which closed its first deal for the fund in 2005, the $1.6 billion acquisition of fashion label Tommy Hilfiger Corporation.

While Skadden raided Baker, its New York rival Milbank took a three-partner team from Freshfields. In summer 2004 tax partner Rolf Fueger and corporate specialist Norbert Rieger moved together with Nussbaum, who was global cohead of private equity at the Magic Circle firm, to launch Milbank's Munich office. Unlike other American firms that have entered the Munich market, Milbank doesn't boast a leading buyout practice in the United States. So the 18-lawyer Munich office has to rely on winning work from its own stable of clients. Private equity houses Apax and Carlyle, as well as Goldman Sachs Capital Partners, L.P., came with Nussbaum and his team. The firm also represented ProSiebenSat.1 Media AG on its ¤3 billion disposal last year to Kohlberg Kravis Roberts & Co. and Permira.

For Kirkland, it was client Bain Capital that led the firm to Munich, its first office in continental Europe. While Kirkland enjoys close links with Bain in Europe through London partner James Learner, it has several rivals in Germany: Latham & Watkins's Jörg Kirchner and Hengeler Mueller's Maximilian Schiessl have also worked for Bain. When Bain opened in Munich in 2002, K&E followed in 2005, after luring Kullmann from Clifford Chance. Since then, Kirkland has developed a 20-attorney practice, including eight partners, and has attracted some new clients in Germany, including recent work advising U.K. private equity house Bridgepoint Capital Limited on its acquisition of German company RodenStock Technologie Holding GmbH from Permira for more than ¤500 million.

Kullmann is clear on how Kirkland's Munich office can prosper: "We don't try to compete with the big firms in Germany," he says. "Why would [corporate giants such as] RWE or BMW use Kirkland for German work? You need to identify your target market and stick to it."

In fact, none of these three American firms have ambitions to grow in Munich beyond about 40 lawyers. "With the high focus we have, we don't need to be a huge machine," Nussbaum says. "We want small teams that are very partner-focused." The small offices also mean a level of autonomy that Nussbaum, Mayer, and Kullmann all say they find very congenial. It's typical to hear a partner who has recently joined a U.S. firm from a larger U.K. rival rave about his new firm's greater collegiality and slimmer bureaucracy. "We've never had a call about what we are or what we aren't doing," Mayer says. "As long as the numbers are straight, then the U.S. is happy."

Culture wasn't the only draw, however. Although none of the three lawyers would discuss their compensation, Nussbaum, Mayer, and Kullmann all joined firms that had higher profits per partner than their previous firms. At the time Mayer switched teams, Skadden's PPP was $1.7 million, almost three times that of his old firm, Baker & McKenzie. When Nussbaum joined Milbank in 2004, Freshfields's PPP was $1.3 million, versus $1.9 million at Milbank. Kullmann left Clifford Chance when the U.K. firm's PPP was $1.2 million, compared with almost $2 million at Kirkland. (American firms generally enjoy a further recruiting advantage over British firms: the absence of lockstep compensation.)

Arguably, nothing confirmed Munich's appeal more than the arrival of the cautious German independents Hengeler Mueller and Gleiss Lutz. In the past they acted for major Munich corporations such as Münchener Rückversicherungs-Gesellschaft AG (Munich Re) and Bayerische Hypo-und Vereinsbank AG without having offices in the city. Gerhard Wegen, a Stuttgart-based corporate partner at Gleiss Lutz, says that clients used to see an advantage in retaining firms outside Munich. "It seemed to be a leaky, gossipy market," he says, "so if you had, say, a big antitrust case, a company may not have wanted it to be handled in Munich." That has changed, Wegen says: "Clients such as Siemens said [to us], "We want to give you more work, but you're in Stuttgart. You should move to Munich.' " Gleiss opened in the city in 2001 and now has an office of just under 20 attorneys, developed largely through organic growth. In a sign of the firm's commitment to growing the office, two of the four associates that Gleiss made partner this year were based in Munich.

Hengeler did not arrive in Munich until early last year. Hiring Freshfields corporate partner Hans-Jörg Ziegenhain signaled the firm's seriousness, particularly since Hengeler rarely makes lateral hires at the partner level. The firm's five-partner team acts for a range of major clients, including Bayer AG, Germany's national railway operator Deutsche Bahn AG, and private equity houses EQT and Bain Capital. "Although the distances are not far [within Germany] and communications are good, there's an advantage to being seen on the block, close to clients," Ziegenhain says.

As more firms arrive, however, the Munich market may be reaching some natural limits. Partners at firms across Germany complain about how hard it is to hire qualified young lawyers. Munich firms have a slight advantage because people want to live there. But even the Munich hiring market is tight. German lawyers estimate that only between 500 and 600 lawyers graduate in Germany each year with the kind of education and experience that the large commercial practices want; firms such as Nörr, Gleiss Lutz, and Hengeler need to hire between 25 and 50 such lawyers every year. "There's a war for talent going on in Germany," says Nörr corporate partner Dieter Schenk. "Everyone's finding it hard."

At higher levels, there's always the danger that a key partner might be hired away. Private equity business tends to be highly portable, allowing a firm to ramp up quickly with a few savvy lateral hires. But the work can disappear just as quickly if those partners jump to another firm. In Munich, Freshfields has suffered more than most, losing key partners to both Milbank and Hengeler. The firm opted not to respond to the departures with a string of lateral hires. Instead, after Ziegenhain left, M&A heavyweight Epe started to split his time between Düsseldorf and Munich. "We have a very strong team here with a focused practice and high-profile mandates," says Munich head Barbara Keil, citing the office's work last year for Siemens in the ¤4.2 billion acquisition of Bayer's diagnostic business.

Some established firms say the Munich market might have gotten a little too crowded for its own good. They're skeptical about how much deal work there is to go around. The three-way struggle for Bain's work is a good example. "We've seen all these U.K. and U.S. firms come to [Munich], and they all say that they're going to do M&A and private equity," says Matthias Bruse, a corporate partner at P+P Pöllath + Partners, a mid-market independent firm with offices in Berlin and Frankfurt, as well as Munich. "But if you look at how much work is available, it's fair to say that [the market is] very competitive."

Even so, the growing ambition of the buyout houses is generating excitement. Last fall, Milbank's Nussbaum advised Goldman Sachs's private equity arm, part of a consortium led by Bain Capital (which was advised by Hengeler Mueller), in a multibillion-euro bid for German tire and car parts company Continental AG. Although the bid was ultimately unsuccessful and Continental remains listed on the DAX, it reflected a major shift: private equity funds setting their sights on one of Germany's largest public companies.

"It was the first publicly known takeover bid for a DAX 30 company," Nussbaum says. "Everyone is talking about these kind of deals and waiting for them to happen." Where previously commentators spoke of the potential of the Mittelstand-Germany's vast collection of family-owned businesses that are the backbone of the country's corporate sector-now the focus is firmly on which DAX 30 company will be the first to be taken private. In April 2006 Gleiss Lutz advised The Blackstone Group L.P. on its acquisition of a 4.5 percent stake in Deutsche Telekom AG for ¤2.6 billion. The investment in Germany's national telecoms operator was seen by many as a sign that the German government has recognized private equity's potential to help attract foreign investment.

With a plentiful supply of debt financing for potential bids, the buyout market shows no signs of slowing. Last winter many resorts in the Alps experienced one of the worst seasons on record. It's a worrying sign of global warming, but for Munich lawyers, the dearth of snow isn't all bad: There's now less temptation to make that quick getaway on a Friday afternoon.


© 2016 Kirkland & Ellis LLP