As the privatization era came to an end, and the global financial crisis hit the M&A legal market, law firms operating in Hungary had to seek new opportunities and relocate their resources. Local teams emerged and professionals turned towards restructuring, reprivatisation and dispute resolution issues instead of M&A transactions.
During the last couple of years, law firms operating in Hungary had to face the negative effect of the end of the privatization era, namely, the era of “mega-deals” is practically over. “Almost immediately after the end of the privatization, large – mainly US – law firms left Hungary, as their fees and tariff structure could be covered only in large privatisation deals. It is very likely that these law firms had never regarded Hungary as a target location for long term operation,” says Mihály Barcza partner at Oppenheim Law Firm.
However, according to Barcza the financial crisis just accelerated a long going eradiation. “Beside the expat members of the local management regarded local mid-sized law firms with experienced teams equivalent to big names on some transactional fields. In addition, parallel with the integration of international firms Hungarian decision centres faded or even disappeared and the volume of transactional cases driven from Hungary decreased. The financial crisis just accelerated this course, first shook, and then simply terminated the dominance of international law firms by 2010” he adds.
This situation is reflected by the 2010 issue of Legal 500: according to the publication, three out of the seven first-tier M&A law firms are Hungarian, while four out of the eight leading individuals of the sector are also Hungarian. Country managing partner András Posztl at DLA Piper also confirms the rise of “local” expertise. He says that the business model of global business law firms is more effective in Hungary; that is, the law firm follows its client all around the world and handles their legal matters.
In parallel with the changes, law firms had to alter their activities in order to meet clients’ demands. David Dederick, managing partner of Weil’s Budapest office says that the last decade saw substantial growth in legal services in the real estate, banking and finance and private equity areas, but all of these practices were heavily impacted by the global financial crisis.
“These days, although we continue to see a reasonable level of activity in our traditional transactional practices, the insolvency and restructuring, dispute resolution and regulatory (energy, healthcare and TMT) areas are among our busiest. Once ancillary to our traditional transactional practices, these segments have grown to become core practice areas for our office.
For instance, László Nagy, who was appointed to our global partnership in 2010, was once primarily an M&A lawyer but now spends most of his time on Dispute Resolution,” adds Dederick.
Hungary was significantly impacted by the financial crisis, and its effects – in particular diminished bank lending activity – are continuing. This obviously resulted in a decline in work for banking and finance practices as well as other practices dependent upon the availability of bank financing, such as private equity buy-out work and real estate transactions. Further, many clients responded to the financial crisis by cutting costs and legal services budgets were not spared. This has meant that law firms have had to compete for a “slice” of a shrinking legal services “pie”.
Many firms chose fierce fee competition as a primary response, but this is often short-sighted and counter-productive, especially when firms offer unrealistic fees just to get any work or in the desperate hope of winning a new client.
“Unrealistic fee arrangements can lead to diminished quality of service and low client satisfaction. Instead, Weil has sought to place even greater emphasis on the needs of clients, and we strive more than ever to ensure that we continue to meet or exceed client expectations across the board” adds Dederick.
Though Oppenheim was able to grow by double digits in the first year of the crisis, the market significantly shrank thanks to the decrease of M&A deals. According to Barcza, nowadays cases concerning restructuring and distressed sales are more common than the former acquisitions aiming at quick growth. However, Barcza does not expect significant changes this year; the M&A segment will likely remain silent, except for private equity transactions, which require lower volume of capital investment. He also sees growing activity and demand in the compliance segment.
According to Posztl, the financial crisis of 2007 made law firms very cautious. “The volume of dismissals was significant, and though law firms started to hire new associates in 2010, their total headcount is still lower than before the crisis,” he adds. As for restructuring activity, DLA Piper moved in the direction of restructuring and regulatory matters. The growing demand for the latter service was triggered by new regulatory measures in the banking and energy sector due to the unifying ambitions of the EU. There is a growing demand for reprivatization cases, i.e. the government is reviewing some of the former contracts (e.g.: different PPP-schemes and renationalizing Malév).
At the same time, Posztl also sees a growing interest from the investors of BRIC countries (Brazil, Russia, India, China) for classic acquisition deals. “This is a big change, as previously US or Western European buyers were dominant, but BRIC countries were not hit hard by the financial crisis, so they want to invest,” he said. A good example for that practice is the Chinese acquisition of the Hungarian plastic maker Borsodchem.
The number of such deals is growing, but according to Posztl, law firms have to be cautious. “The threat of the global economic double dip hangs over us, we do not know how long it will last,” he adds.
This article appeared in the BBJ's Law & Tax special report on May 6, 2011.