With international law firms still flocking to South Africa, the region's legal market is becoming increasingly crowded. As many local outfits look to take on the influx of newcomers with plans to expand their offering across Africa, others are forming alliances with their global counterparts. Pui-Guan Man uncovers the challenges facing both sets of firms

According to many lawyers in South Africa the vibe at the African Mining Indaba – a practically mandatory event in every major local law firm's calendar – was somewhat reserved this year. It is not hard to see why, when taking into account reduced output volumes from the economy's cornerstone mining sector. 

Onlookers observe that South Africa is facing an onslaught of negative sentiment given the volume of industrial disputes and unrest in the mining sector as well as the imminent presidential election, causing many investors to hold off until a clearer picture emerges. Added to this, the rand has tumbled against the world's major currencies, resulting in a hike in benchmark interest rates. 

Some lawyers in the jurisdiction have been surprised, then, at the influx of international newcomers in the past year. Linklaters became the first of the magic circle to establish a significant presence on the ground when it sealed an alliance with Webber Wentzel at the end of 2012, while Hogan Lovells forged a tie-up with former Eversheds alliance firm Routledge Modise in December last year, with the latter now trading under the Hogan Lovells brand. Eversheds itself re-entered the South African market at the same time, after signing an agreement with Mahons Attorneys a year after its split with Routledge.

They join a host of global firms that have already set up shop in the region, including DLA Piper, Norton Rose Fulbright, Baker & McKenzie and White & Case.

"I thought the mining and manufacturing slowdowns might have led to a decrease in appetite to establish a presence in South Africa," muses Norton Rose Fulbright South Africa managing partner Rob Otty (pictured, below). "Instead, quite surprisingly, we have had new entrants like Hogan Lovells, and increasingly fewer independent firms as a result. It was not what I was anticipating." 

Hogan Lovells former Africa head Andrew Gamble, who led the team negotiating the combination with Routledge, says the progress of international players in South Africa such as Norton Rose Fulbright, which merged with local practice Deneys Reitz in 2011, helped inspire the firm's decision to open in the jurisdiction through a combination. 

"Norton Rose Fulbright has been very successful in growing a lot of business out here," says Gamble. "It shows there is enthusiasm for global firm presences, and that there are not only good opportunities in the region but also international muscle to help support them. It has enabled them to create a seamless offering, and on that basis they have taken away a significant amount of work from the independents."

But while the legal market in South Africa has certainly begun to take a different shape, the independent firms appear relatively unruffled by the new entrants. "We've seen the entry of some international firms into South Africa lately, but it hasn't made much of a difference so far as we are still up against the same competition. These global partnerships merely present to us the same competition in a different guise," says ENSafrica chief executive Piet Faber.

A partner at a firm associated with an international player adds: "I would say that in South Africa there has been minimal impact made by the global firms. Local lawyers who have joined up with them are still working on exactly the same mandates they had before and are working with the same clients."

Beyond South Africa's boundaries

With the South African legal market getting more competitive, an upsurge in activity across the continent in general has led many local firms to consider expansion beyond South Africa's borders. In this way they hope to capture inward investment into Africa as a whole, showing potential clients they have capabilities beyond the one or two hubs through which international firms hope to service the continent.

For example, ENSafrica has embarked on a mission to rebrand as a pan-African firm, not least reflected in its name change from ENS. The firm, which has already set up offices in Burundi, Uganda, Rwanda and Mauritius over the past two years, is aiming for a presence in 12 African countries within two years' time. At the time of writing, the firm said it was holding talks with six outfits, which it would not name.

Last year ENSafrica bulked up its Mauritius offering with the hire of former Linklaters head of Bucharest Michael Schilling, who left the magic circle firm in 2008 and was brought on board for his experience in opening in emerging markets.

Despite persistent rumblings that ENSafrica has been actively pursuing an international merger partner, Faber insists that a global tie-up would undermine the firm's cultural model, and steadfastly denies discussing the prospect with any international firms. "For the last five years the UK and US markets have seen a downturn. For South African law firms there is great opportunity and more low hanging fruit here in Africa than there is in London.

"You also cannot bill in Africa using the same pound or dollar rates that are used in countries like the UK and the US. Having different profit models makes the concept of a truly unified firm difficult, with regards to the local firms that have partnered with the big international firms.

"For these reasons a partnership between ENSafrica and a global firm is unlikely to happen – it is difficult to see what value it would add. Our differentiation is our 'one firm, one team' culture and model. We believe everyone in the firm needs to be aligned to the same objectives and pulling in the same direction. A transatlantic merger could destroy this."

Fellow big five law firm Bowman Gilfillan has also been focusing on setting up a network of offices across the continent, and is aiming to have eight to 12 outposts in roughly two to three years. Its most recent merger, with 15-lawyer Madagascan firm John W Ffooks, goes live on 1 March, bringing the number of member firms in its Africa group to seven. Bowmans' head of Africa, Jonathan Lang, says that, by doing this, the firm maximises its chances of winning high-quality referral work.

"By setting up a network of integrated offices, we hope not only to capitalise on deal flow in those countries and the region by leveraging our brand, but also to increase our attractiveness to bigger international firms in terms of referral work as local counsel on large mandates," he says.

Lang recalls that although Bowmans did not get as far as entering any formal talks with global outfits, news of the alliance between Linklaters and Webber Wentzel had "upped the ante" and kick-started a prolonged internal debate on whether to follow in their footsteps, with the firm talking to several relationship firms to discuss its positioning in the market.

"We spent several months considering whether an international partnership was the right option for us, but we decided around mid-2013 that for now the best thing for us is to remain independent. Would we ever enter into an alliance? One can never say 'never' – who knows what the scope for an alliance will be in, say, five years' time?"

Given the proximity of the rest of Africa, expansion across the continent is widely regarded as the logical step for local players as an alternative to throwing their lot in with an international firm. 

Werksmans director and Lex Africa chairman Pieter Steyn says: "Expansion into the rest of the continent on the whole is the logical step for South African independents to take, whether through networks or by opening offices, as this is generally easier and cheaper for them than operating outside Africa.

"International firms also seem to be looking to South African practices as their preferred partners for African operations. This may be in part because South Africa is one of the largest sources of direct investment into Africa and the country remains a viable base or gateway for African investments."

Global firms' ambitions

Growth in sub-Saharan Africa is outstripping many of the world's economies, with the International Monetary Fund last November forecasting average growth of 6% this year. The challenge for South African firms now is to fight off competition from the band of international players eying the same economic hotspots, some of which already have the upper hand as several African nations' commercial laws are structured on French and English contract law models, as opposed to South African models that lean heavily on Roman-Dutch law.

Partners at Clifford Chance, for example, predict an on-the-ground presence will be set up in sub-Saharan Africa within the next 12 months, with Johannesburg, Lagos and Nairobi the most desirable areas for expansion, in order of preference.

A senior partner at the magic circle firm said that South Africa would provide an ideal set-up from which to expand given its position as a gateway to other African economies, thanks to its proximity, comparative stability and more sophisticated infrastructure.

Hogan Lovells head of Africa Jeremy Brittenden says that although South Africa has the largest economy and best infrastructure of Africa's 55 nations, the merger with Routledge Modise is just the first step in its Africa strategy.

Brittenden explains that the combined practice is actively looking at how to put a broader Africa-wide network in place, along with making potential hires to operate it. It is firming up its plans over the next two months before approaching clients and local firms with the strategy.

The practice currently has a list of jurisdictions it is assessing for market potential and has identified five target markets, although they were not named. Brittenden highlights North Africa as being of particular interest. "We have a good dozen markets that are currently looking very promising but we need to take a close, hard look at what is right for us and our clients," he says. "The critical aspect is in assessing the types of relationship or presence needed to succeed in those markets and delivering the quality advice clients expect from us.

"For example, Nigeria might be an obvious choice but it is not that receptive to an international brand on the ground, so the value in opening a presence there may be limited. North Africa, on the other hand, is more receptive, not least down to its proximity to Europe, and deals are increasingly being done on an English law basis. Tunisia has seen a lot of activity, while Egypt and Libya remain significant if volatile markets."

Meanwhile, Linklaters – along with its alliance partner Webber Wentzel – has a strategy to service other key African jurisdictions by using its London, Paris and Lisbon offices to operate as local law centres. 

"One of the drivers of the tie-up for Webber Wentzel was that we have French, English and Portuguese law capability, which we can offer them in a way that complements their own skills base as well as the opportunity to tap into a larger international network of clients," says Linklaters Africa group co-head Andrew Jones.

"Regarding the wider continent, we organise our strategy in terms of relevant language and local legal systems. Our Paris and London offices advise on transactions in Francophone and Anglophone regions, and, as the only international firm with a Lisbon office, we can also deploy specialist Portuguese lawyers in Lusophone nations. Having specialists available in this way to complement the best local lawyers is a much more effective method than opening up our own offices on the ground."

Tie-up troubles

With cultural and economic differences throughout the continent – not least between African firms and their UK and US counterparts – expansion requires careful navigation. Onlookers have observed that the general worry in South Africa is that involvement with a City firm would inevitably lead to being micromanaged by their Western counterpart.

Moreover, partners have said that the tendency for UK legal consumers to opt for established brand names is not something that the African market has fully adopted yet. "Being in a local firm with an international partner would no doubt open doors, but clients have become a lot more sophisticated and discerning when choosing lawyers. So I don't think it's the Holy Grail by any means," says a senior lawyer based in South Africa.

It was less a case of cultural stumbling blocks that led to the collapse of the Eversheds union with Routledge – then known as Eversheds Africa – in 2012, but rather old-fashioned conflict management; an obstacle in many tie-ups. 

It is understood that the firms clashed after one of Eversheds' commercial clients conflicted with an existing Government-related client of Routledge's. 

Hogan Lovells' head of corporate in Johannesburg, Warren Drue, formerly head of commercial at Routledge, says: "There were two primary reasons for parting ways with Eversheds. It was too divergent, for one – we saw ourselves as a corporate practice but Eversheds was getting more commoditised. They sought to do a cross-sector of work that was not all corporate. And then there was a client conflict that could not be resolved. We learned a lot from our experience with Eversheds."

The future of expansion

Despite these shortcomings, there are some clear advantages to forming combinations for both sides. For international firms, South Africa is evidently still seen as the stepping stone to growth economies in sub-Saharan Africa.

And for South African firms, an arrangement could go a long way in lifting their business up the food chain. It could deliver a reputation and brand that leads to higher-quality projects and clients beyond the domestic market, not to mention scope for joint pitches on larger deals. It also provides access to international firms' know how – from databases to training programmes and secondments for younger lawyers. 

Universally for the former South African independents, the potential to tap into the client bases of their international counterparts was the main attraction. "From our perspective, the driver came from corporate clients requiring global services," says Drue. "The overall credibility of Hogan Lovells' practice and international reach, particularly in Southeast Asia and both North and South America, helped seal the deal."

There is also the added benefit of potentially having the financial support of an international firm, with the scope of using its resources in scenarios including making counter offers for key partners looking to leave.

Meanwhile, lawyers in South Africa reckon that global law firms  looking to gain ground in Africa, but without an office in the continent's key hubs, will be feeling the pressure to make a move as the market becomes more saturated.

"Top firms without a significant presence are increasingly finding themselves in the position where they will lose credibility in the African market if they are not seen on the ground," says Otty. 

"They will need to do something substantive as Africa corporates become ever-more dominant and look to expand beyond the continent. Changing markets demand more practitioners on the ground to provide added value so an offering carries more weight."

Despite the temporary slump in M&A activity in South Africa, new resource finds across the continent – such as the natural gas field discovered in Mozambique last year – are fuelling projects, energy and infrastructure work in the wider African market. International firms thinking of chasing these opportunities will need to step up their game as their rivals already on the ground turn up the heat.

For more, see When in Africa – the dangers of a 'one size fits all' approach to Africa.

• Legal Week will host the third annual Corporate Counsel Forum Africa in Johannesburg this October, alongside the African Legal Awards 2014.