As Economic Crisis Drags On, Firms in Spain Reshape Their Practices

Call it a sign of the times. In May the Spanish government announced the results of its beauty contest for legal work on a €35 billion emergency fund designed to reduce regional government debt. Bidders for the work, which involved setting up the legal framework for the banks to disperse the funds to unpaid suppliers, included Spain's three largest firms --Cuatrecasas, Goncalves Pereira; Garrigues; and Uria Menendez -- and at least one Magic Circle firm, Clifford Chance. While it wasn't surprising that Cuatrecasas, one of the oldest operating law firms in the Iberian market, ended up winning the work, what is shocking is the firm's suggested fee: €1.

That wasn't a fluke. Uria Menendez also volunteered to do the work for €1, and Garrigues and Clifford Chance offered reduced fees in an effort to land the prestigious assignment, which could lead to more work from the Spanish government. "Given the economic situation, we felt it was the right thing to do as a service to the government," says Cuatrecasas corporate partner Federico Roig. (Uria declined to comment. Garrigues and Clifford Chance confirmed that they offered a reduced fee, but say that it was a reasonable one.)

The economic crisis in Spain is now in its fifth year and shows little sign of abating soon. The country's banking system, which accounts for 20 percent of Spain's $1.49 trillion GDP, is on the brink of insolvency and will require up to a €100 billion ($123 billion) bailout from the European Union. And in order to comply with the E.U.'s conditions for the bailout funds, in July Spanish prime minister Mariano Rajoy proposed an austerity plan that would raise the Value Added Tax (VAT) on goods and services by 3 percent -- increasing it to 21 percent -- while also cutting unemployment benefits and reducing civil servants' pay. Although the Spanish government clearly needed to take action to reduce the country's deficit, the measures could stifle consumer spending and thus deepen the recession.

The prolonged downturn has affected law firms in the Iberian market, particularly those whose client base is primarily comprised of large Spanish companies. Although there's been an uptick in labor, tax, litigation and insolvency work in Spain and Portugal, financing and mergers and acquisition work has slowed ­dramatically.

At the three biggest Spanish firms, revenues from 2010 to 2011 increased only incrementally. Garrigues, the largest of the triumvirate, posted revenue of €355 million ($495 million) last year, up just 1 percent from 2010. Cuatrecasas' revenue saw a meager 0.4 percent increase during the same time period, with revenue of €241.7 million ($321 million) in 2010 and €242.6 million ($338 million) in 2011. And Uria Menendez reported a 1.5 percent increase last year, with revenue of €188 million ($262 million).

This year, things are looking even bleaker. Garrigues, the only firm in the region whose fiscal year ends on August 31, expects that its revenue will be down 2 percent to 3 percent for 2012. Global firms that work in the region, such as Freshfields Bruckhaus Deringer, Baker & McKenzie, Clifford Chance, and Jones Day, have been affected as well. While none of these firms disclose revenue figures for Spain, lawyers at the firms nonetheless admit that the crisis has affected their practice in the region.

In order to compensate for the loss of revenues from lucrative practice areas like M&A, firms have had to make critical changes: reducing operating costs, more actively managing their lawyers' practices, restructuring compensation plans, and -- in some cases -- reducing their head counts. "We increased our numbers [between 2000 and 2008] because the economy was booming and we thought it would continue," says Garrigues managing partner Fernando Vives. "So now we've had to reduce and adapt our workforce."

Although the 10 lawyers interviewed for this article were publicly stoic about Spain's economic crisis, in private conversations they were clearly worried about the effects of a continued downturn on their firms and their country. Nearly all expressed hope that the economy had bottomed out and would begin to turn around this fall. "We are facing the crisis more optimistically now, but not naively so," says Freshfields' managing partner for Spain, Inaki Gabilondo.

From the late 1990s until 2007, Spain had the fastest-growing economy in the European Union. The country experienced a decade­long real estate boom; at its peak in 2007, construction accounted for 16 percent of the GDP. The thriving real estate market, coupled with a high volume of leveraged buyout and M&A deals, attracted U.S. and U.K. law firms to the region, and spurred the growth of domestic firms within Spain and abroad. Spanish M&A activity more than doubled from 2003 to 2007, and the value of the deals peaked at $194 billion in 2007. But then came the downturn, fueled by the collapse of the real estate market in 2008, which in turn resulted in the crash of the cajas, the small Spanish savings banks that were heavy on home mortgages and have little access to capital since they aren't publicly traded.

The majority of the 45 cajas were forced to merge -- there are now just 14 -- and this helped generate enough work for big firms in Spain to weather the recession. But that work is drying up, and over the past five years M&A activity has declined steeply. "It's not a good time for corporate transactions. There aren't any takeovers or acquisitions," says Jose Maria Alonso, the head of Baker & Mc­Kenzie's dispute resolution team in Madrid and the former managing partner at Garrigues. Alonso cites two large deals that have been put on hold because of the crisis: the privatization of Spanish airport operator Aeropuertos Espanoles y Navegacion Aerea (AENA), and the initial public offering of lottery operator Loterias y Apuestas del Estado (LAE), which would have been the largest IPO in Spanish history.

As Economic Crisis Drags On, Firms in Spain Reshape Their Practices

Call it a sign of the times. In May the Spanish government announced the results of its beauty contest for legal work on a €35 billion emergency fund designed to reduce regional government debt. Bidders for the work, which involved setting up the legal framework for the banks to disperse the funds to unpaid suppliers, included Spain's three largest firms --Cuatrecasas, Goncalves Pereira; Garrigues; and Uria Menendez -- and at least one Magic Circle firm, Clifford Chance. While it wasn't surprising that Cuatrecasas, one of the oldest operating law firms in the Iberian market, ended up winning the work, what is shocking is the firm's suggested fee: €1.

That wasn't a fluke. Uria Menendez also volunteered to do the work for €1, and Garrigues and Clifford Chance offered reduced fees in an effort to land the prestigious assignment, which could lead to more work from the Spanish government. "Given the economic situation, we felt it was the right thing to do as a service to the government," says Cuatrecasas corporate partner Federico Roig. (Uria declined to comment. Garrigues and Clifford Chance confirmed that they offered a reduced fee, but say that it was a reasonable one.)

The economic crisis in Spain is now in its fifth year and shows little sign of abating soon. The country's banking system, which accounts for 20 percent of Spain's $1.49 trillion GDP, is on the brink of insolvency and will require up to a €100 billion ($123 billion) bailout from the European Union. And in order to comply with the E.U.'s conditions for the bailout funds, in July Spanish prime minister Mariano Rajoy proposed an austerity plan that would raise the Value Added Tax (VAT) on goods and services by 3 percent -- increasing it to 21 percent -- while also cutting unemployment benefits and reducing civil servants' pay. Although the Spanish government clearly needed to take action to reduce the country's deficit, the measures could stifle consumer spending and thus deepen the recession.

The prolonged downturn has affected law firms in the Iberian market, particularly those whose client base is primarily comprised of large Spanish companies. Although there's been an uptick in labor, tax, litigation and insolvency work in Spain and Portugal, financing and mergers and acquisition work has slowed ­dramatically.

At the three biggest Spanish firms, revenues from 2010 to 2011 increased only incrementally. Garrigues, the largest of the triumvirate, posted revenue of €355 million ($495 million) last year, up just 1 percent from 2010. Cuatrecasas' revenue saw a meager 0.4 percent increase during the same time period, with revenue of €241.7 million ($321 million) in 2010 and €242.6 million ($338 million) in 2011. And Uria Menendez reported a 1.5 percent increase last year, with revenue of €188 million ($262 million).

This year, things are looking even bleaker. Garrigues, the only firm in the region whose fiscal year ends on August 31, expects that its revenue will be down 2 percent to 3 percent for 2012. Global firms that work in the region, such as Freshfields Bruckhaus Deringer, Baker & McKenzie, Clifford Chance, and Jones Day, have been affected as well. While none of these firms disclose revenue figures for Spain, lawyers at the firms nonetheless admit that the crisis has affected their practice in the region.

In order to compensate for the loss of revenues from lucrative practice areas like M&A, firms have had to make critical changes: reducing operating costs, more actively managing their lawyers' practices, restructuring compensation plans, and -- in some cases -- reducing their head counts. "We increased our numbers [between 2000 and 2008] because the economy was booming and we thought it would continue," says Garrigues managing partner Fernando Vives. "So now we've had to reduce and adapt our workforce."

Although the 10 lawyers interviewed for this article were publicly stoic about Spain's economic crisis, in private conversations they were clearly worried about the effects of a continued downturn on their firms and their country. Nearly all expressed hope that the economy had bottomed out and would begin to turn around this fall. "We are facing the crisis more optimistically now, but not naively so," says Freshfields' managing partner for Spain, Inaki Gabilondo.

From the late 1990s until 2007, Spain had the fastest-growing economy in the European Union. The country experienced a decade­long real estate boom; at its peak in 2007, construction accounted for 16 percent of the GDP. The thriving real estate market, coupled with a high volume of leveraged buyout and M&A deals, attracted U.S. and U.K. law firms to the region, and spurred the growth of domestic firms within Spain and abroad. Spanish M&A activity more than doubled from 2003 to 2007, and the value of the deals peaked at $194 billion in 2007. But then came the downturn, fueled by the collapse of the real estate market in 2008, which in turn resulted in the crash of the cajas, the small Spanish savings banks that were heavy on home mortgages and have little access to capital since they aren't publicly traded.

The majority of the 45 cajas were forced to merge -- there are now just 14 -- and this helped generate enough work for big firms in Spain to weather the recession. But that work is drying up, and over the past five years M&A activity has declined steeply. "It's not a good time for corporate transactions. There aren't any takeovers or acquisitions," says Jose Maria Alonso, the head of Baker & Mc­Kenzie's dispute resolution team in Madrid and the former managing partner at Garrigues. Alonso cites two large deals that have been put on hold because of the crisis: the privatization of Spanish airport operator Aeropuertos Espanoles y Navegacion Aerea (AENA), and the initial public offering of lottery operator Loterias y Apuestas del Estado (LAE), which would have been the largest IPO in Spanish history.