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The recently-concluded Helsinki Summit
has focused attention on EU enlargement, with eastward expansion
now firmly on the agenda. Along with the six countries already
negotiating for candidacy (Poland, Hungary, Czech Republic,
Slovenia, Estonia and Cyprus), the EU has now agreed to initiate
accession talks with Slovakia, Malta, Bulgaria, Romania, Latvia and
Lithuania from the start of 2000.
Against this backdrop, came the November announcement from
Linklaters & Alliance that it has decided to expand its central
and eastern European presence (previously centred in Moscow, Prague
and Warsaw) with a trio of new offices in Hungary, Slovakia and
Romania. The development is powered by three high-profile lateral
hires - with the Bucharest and Bratislava bridgeheads staffed by
former Burns Schwartz local managing partners, and the Budapest
office headed up by the former head of Clifford Chance's Hungarian
finance practice group.
The move is interesting, evincing as it does a substantial
commitment by one of the City's top finance practices to countries
that are still very much on the periphery of headline market
activity. Nick Eastwell, the Linklaters' partner responsible for
central and eastern Europe, explains: "The whole is greater than
the sum of its parts - investment banking clients are viewing this
region as a long-term prospect and they can now see that we have a
committed strategy in the region. It would be wrong to say that
there will be any huge surge in activity in these countries over
the next 12 months, but as they head towards EU membership, there
will inevitably be more integration, more investment and a need for
experienced legal advisers on the ground."
That Linklaters has opted to pursue this strategy shows just
how seriously US and English law firms are taking long-term
prospects in the region, with EU expansion talks driving
developments several years ahead of any likely new accessions. At
this end of the legal market, speed is all - there are precious few
experienced local lawyers available in any of the former eastern
bloc countries and the race to snatch up the best talent is driving
major international firms to initiate expansion strategies well in
advance of any immediate payback. Of course there is work to be
done, but nobody would pretend that substantial prospects are on
the horizon just yet - EU membership for Slovakia is unlikely to
come before 2005, with Romania following on behind.
As things stand, most of these EU hopefuls (including
Linklaters' three new bases) are still regarded as emerging
markets. Fixed income investors can buy government bonds issued out
of central and eastern Europe, but until local currency risks are
reduced and liquidity improves, these countries will remain
outsiders. Their market risks are directly linked to domestic
economic and political developments, limiting their appeal to
non-emerging market players - and this will not change until they
have taken positive steps towards joining the single currency.
Under prevailing conditions, the three countries with most
investment potential are emphatically the Czech Republic, Poland
and Hungary. All carry an investment grade rating, although their
progress towards effective capital markets and banking regulation
varies wildly. The latest 'Transition Report' released by the
European Bank for Reconstruction and Development (EBRD) underlined
the comparative proficiency with which Hungary has navigated the
last ten years, with particular recognition accorded to the
country's continued access to international capital markets,
despite emerging market turmoil, as well as to strong commitment to
reforming the banking sector.
It is Linklaters' move into Bucharest which stands out.
Although Clifford Chance is known to have been investigating
Romanian prospects, Linklaters' opportunistic arrival gives the
firm a real head-start on the top-end competition. And from a
lawyer's perspective, according to Eastwell, the country - one of
the poorest countries in the region - has a lot to offer: "Romania
has a very well-advanced capital markets infrastructure, which is
the result of its sustained commitment to reform - they have even
recently created a new law for taking security over immovable
property. The problem is that although they have a comparatively
sophisticated infrastructure in place, they still don't have the
economy to sustain it."
Linklaters has already been involved in matters arising from
the country's privatization programme, acting for the financial
advisers, Daiwa, on the first bank privatization, namely the
strategic sale of 51% of the Romanian Development Bank to Société
Generale late in 1998. A second sale to portfolio investors is
scheduled for 2000, lead managed by Robert Fleming. The firm has
also been advising the Romanian government during 1999 on a
potential Eurobond issue, which, in the event, never came to market
due to the government's unwillingness to pay the high interest
rates the market demanded. The expectation is that an issue will
come to the market in 2000 - Romania clearly needs a benchmark in
place before further corporate/state sector debt issuance can
follow.
If Linklaters has Romania all to itself, the situation in
Slovakia is rather different. The country has been a focus of
attention for several of the major US and UK law firms for some
time. CMS Cameron McKenna, Lovell White Durrant and Weil Gotshal
& Manges are all reckoned to be on the brink of opening
Bratislava offices, while Allen & Overy was the first
international law firm actually to do so in July 1999. The
competition for experienced local lawyers will be intense - as will
the competition for new mandates. Linklaters advised the lead
managers on the country's June 1999 Eurobond issue - but Eastwell
readily acknowledges that the country's financial and securities
regulatory framework is all but non-existent: "As yet, there is not
even a Slovakian securities commission in place, although World
Bank and EU Phare programmes have been set up to establish a new
regulatory regime. The situation is really the reverse of Romania -
in Slovakia, the fundamentals are sound enough, but there is still
no credible regulation. That being said, however, new securities
and bankruptcy legislation is now being planned."
Linklaters' expansion into Bratislava, Bucharest and Budapest
is a clear example of the pressures facing the top-end
international law firms. The scrabble for market share means that
new markets now have to be colonized well in advance of any
realistic return on investment.
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