Neglected by foreign advisers for years, the Central and Eastern European (CEE) legal markets enjoyed a few moments of popularity in the press as the decade turned. Most notably, the once-formidable force in the region’s transactional space, Weil, Gotshal & Manges closed its three local branches in Budapest (January 2018), Prague (November 2018) and Warsaw (November 2019).
As the only major Wall Street firm with sizeable CEE coverage (excepting obviously White & Case’s very different model), there were specific reasons behind Weil’s withdrawal. These included a strategic move to focus on the key money centres (the firm also left the Middle East in 2017), a huge amount of local government-related work exposing it to the political turmoil and a large domestic client base not inclined to pay the fee levels demanded by the US elite.
But then Weil was only the latest in a long and eclectic list of firms retrenching in the region. From K&L Gates and Squire Patton Boggs leaving Warsaw and Budapest respectively in 2019 to Hogan Lovells and Norton Rose Fulbright shutting Prague in 2014, through to White & Case withdrawing from Hungary in 2015 and Romania in 2014. Clifford Chance (CC) shut Budapest in 2009, and locals still cite Linklaters’ withdrawal from all CEE markets bar Poland in 2008 as if it happened yesterday.
For some critics, such developments illustrate the lack of long-term thinking among foreign institutions more focused on internal economics than client service. Such players arrived en masse after the fall of the Iron Curtain, when state-owned groups were being privatised and Western businesses were rushing to invest. Such a level of economic and legal transformation was never going to be permanent.
Take Hungary. Post-1989 Budapest was the gateway to the region, the most modern and Western-minded jurisdiction. Weil picked it for its first foreign office in 1991, and a country of less than ten million soon found itself over-lawyered. Three decades on, the clash between its authoritarian government and the EU has hurt business confidence, international companies have steered away, leaving local clients with no intention of paying Western fees.
Even in Poland, by far the largest market in the region, state-owned and public companies are notoriously tough on fees. Also ominous were the signs of a looming German recession due to the close ties with its automotive and manufacturing industries.
You can normally count the number of local €1bn+ M&A deals on one hand each year, and when foreign investors are involved foreign law firms do not need boots on the ground to secure roles. Freshfields Bruckhaus Deringer topped Mergermarket ranking by deal value in 2019 without maintaining a single branch in the region.
Unlike most of the places this column has covered, the market buzz is not focused on which will be the next foreign firm to open, but which one will be the next to depart. But there is a but. Three decades of dominance of foreign law firms in CEE will not be easily overturned.
There is little sign of competitive threat from local independents. Domestic firms are generally small boutiques with little to no regional footprint. Polish leaders Sołtysiński Kawecki Szlęzak and Wardyński & Partners are the only ones to get some mention, partly thanks to their fruitful relationships with international counsel.
Nor are Austrian firms considered a major threat to the Anglo-Saxon elite, although some have large Eastern European footprints, with the region generating roughly half of the 370-lawyer Wolf Theiss’ €73.3m revenue and a third of 300-lawyer Schoenherr’s €80.3m income in 2018/19. ‘We don’t feel as foreigners in these countries,’ says Wolf Theiss partner Claus Schneider. ‘The legal system used to be the same in many of them and it’s not changed completely.’
The closest thing to a regional force is 200-lawyer Kinstellar. Born in November 2008 out of Linklaters’ network in Czech Republic, Hungary, Romania and Slovakia, the firm has since grown to ten offices in Europe and Asia. But even Kinstellar has little appetite to mount a frontal attack on the global elite: it has no presence in the more internationally-minded Poland, choosing to compete with firms in the surrounding jurisdictions.
Weil’s former offices might have been a more potent threat had they decided to create another regional player. But there was never much co-operation between them and each decided to go its own way.
The 51-lawyer Czech spin-off Skils had a successful first year of life according to managing partner Karel Muzikář, with revenue growth in the high single digits to about €18m in 2019: ‘I never wanted to be dependent on the inflow of business from the network, the core business must be from the local office. That’s why we were able to support the business. Not a single lawyer has left as a result of the change.’
Weil’s 20-lawyer corporate, finance and litigation Budapest branch found an unlikely suitor in Bird & Bird’s ten-strong IP, IT and privacy-focused Hungarian arm. ‘The team wanted to continue practising at an international firm, Bird & Bird’s strategy was what I would describe as “practice diversification”,’ says Bird & Bird local head David Dederick, who led the team from Weil. Observers still question how the group will fit into a very different home, and Dederick is cagey on financial performance so far. But the group managed to bring across a key historic client from Weil in the shape of General Electric and has been working with banks including ING and UniCredit.
The larger and more prominent 80-lawyer Warsaw team likewise considered a move to another international firm and was believed to be in talks with Baker McKenzie before resolving to go it alone, its size making integration tricky. Newly-born Rymarz Zdort’s co-founder Pawel Zdort says his team, which billed around €20m in 2018, now has the ambition to become the ‘premier Polish transactional law firm’ the country has long lacked.
But even without Weil, the CEE pecking order still clearly favours international players. Elite firms that decided to stay have everything to gain from less competition, especially as they focus on the more internationally-orientated Poland.
Despite scaling back, White & Case’s 110-lawyer, three-office CEE practice remains by consensus the strongest. ‘I have no doubt about the support of the firm, we are one of the most highly-ranked offices in the network, we are profitable year-after-year,’ asserts Prague chief Petr Pánek, whose office billed around €16m in 2018. ‘The idea is to be at the top of the market and do top deals for international clients and domestic clients [going] abroad,’ adds his Warsaw counterpart Marcin Studniarek, whose branch generated about €18m. ‘Bratislava is a small market but we are the number one player there and that justifies our presence, as we do a lot of international work out of Bratislava.’
These observations are echoed at 122-lawyer Allen & Overy, which maintains offices in Warsaw, Prague, Budapest and Bratislava. ‘It’s a market which is only increasing,’ says Poland partner Dan Cocker. ‘We see new clients coming in from China. It continues to make sense to build our presence in the region.’
CC’s Prague head Alex Cook says its current footprint, with 80 lawyers in Poland and around 60 between Czech Republic and Romania, is ‘exactly what the firm wants’.
Linklaters has grown its Warsaw team slightly from around 50 to just over 80 in the last five years, generating around €22.5m in 2018. ‘It made sense to stay in the largest economy of the region, it is an important jurisdiction for our Polish clients and has increasing relevance for our global clients,’ says partner Daniel Cousens. ‘We do a lot of work on firm-wide deals. The Polish clients are large and increasingly interesting and we are able to service the CEE markets in a sensible way from here.’
But the real story is that the region has become a kind of El Dorado for a group of globetrotting mid-market firms, which speak enthusiastically of busy markets and growing offices. In interviews with nearly 20 partners across Warsaw, Prague and Budapest, Dentons’ name comes up regularly thanks to the enduring strength of the legacy Salans’ business in real estate, still an excellent way to make money in CEE. The firm has continued to grow after the 2013 merger, hiring White & Case’s 30-lawyer Budapest team in 2015 and bulking up its transactional ranks.
Europe chief executive, Prague-based Tomasz Dąbrowski, describes the firm’s CEE business as ‘one of our jewels’. It fields 387 lawyers across six countries, generating around €75m in 2019 with double-digit revenue growth ‘in almost all markets’ and has an established position as Poland’s largest and highest-grossing firm with 212 lawyers billing around €40m.
CMS has an even larger footprint with around 420 lawyers across seven offices generating more than €60m with double-digit growth in 2018/19 (unusually for a continental European jurisdiction, the offices are part of the UK LLP). It topped Mergermarket league table for deal volume in 2019, with clients including Advent International, CVC, Cinven and Mid Europa Partners. ‘We do extremely well, we are very profitable and have a very solid book of business,’ notes CEE corporate head Helen Rodwell. ‘Our roots are deeper and stronger because most of our business is generated on the ground in this region.’
Strong in Hungary and Czech Republic, CMS is struggling more in Poland, where in 2019 it lost a seven-lawyer corporate team to DLA Piper. Another growing force in the region, DLA passed the 200-lawyer mark billing around €45m last year, including a 20% headcount growth to 95 in the Warsaw office.
Several others are expanding, with Eversheds Sutherland merging with 49-lawyer Czech and Slovak practice DHP Legal in December 2018 and DWF acquiring K&L Gates’ 11-partner Warsaw arm in May 2019.
There is still plenty to keep them busy: few megadeals does not mean few deals, with foreign investors still seeing the region as a happy medium between Latin America’s high returns/high risk and Western Europe’s pedestrian returns on sedate growth. Despite slowing, Poland and Hungary’s economies are still expanding at over 4% annually and offer a skilled and cheap workforce. Socially conservative and largely Eurosceptic, local governments have not been hostile to business, with even Hungary recovering after a troubled few years. Real estate is if anything getting busier, with investors now looking beyond Poland to Romania.
True, the list of recent branch closures suggests the next decade is certain to see fewer, margin-conscious elite players in CEE, mostly concentrated around Warsaw. But a different band of international firms look on course to fill that space. As local independents still struggle to make an impact, mid-market players are gearing up to become the driving forces of the legal markets from Bratislava to Bucharest in the 2020s. And this time it looks like they are in for the long haul. LB
marco.cillario@legalease.co.uk