Dutch Philips Electronics said on Wednesday it plans to buy back 5 billion euros ($7.2 billion) of its own shares after hedge fund pressure for the firm to improve its performance and capital structure.
Philips shares gained 2.7 percent to 30.78 euros, having hit 31 euros -- a two-month high, after the announcement, outperforming a 0.4 percent lower DJ Stoxx 50. The stock was top European blue-chip gainer.
Philips said the new buy-back program, to be done within the next two years, starting on Jan. 2, comes after the Dutch upper house of parliament approved a change in tax laws late on Tuesday that increases the amount companies can spend repurchasing shares free of withholding tax from Jan. 1.
"The share buy back program is bigger in size than we anticipated and announced at an earlier date," Petercam analyst Eric de Graaf said in a client note, adding that the fact that the company announced its plans directly after the legislation was passed signaled the urgency it has in this respect.
Philips ended its third quarter with 5.2 billion euros in cash, which makes it an attractive target for activist investors such as hedge funds, who often pressure for the return of surplus cash to shareholders.
Earlier this month, U.S. hedge funds Jana Partners and D.E. Shaw Group, which said they together have a 1.6 percent stake in the company, said they wanted to talk to Philips on its performance and capital structure.
Analysts estimated early this year Philips could generate around 15 billion euros of cash from disposals and operations in 2007 and 2008 and it could take on debt. Philips is currently debt free.
Philips has said it will dispose of its large stakes in flat display supplier LG.Philips LCD and Taiwanese contract chip maker TSMC.
Activist investors have targeted a number of Dutch companies in recent years, forcing some to change their strategy and others to sell unprofitable operations.
British hedge fund TCI was instrumental in promoting a bidding war for ABN Amro, which ended with a consortium led by Royal Bank of Scotland buying the bank for 70 billion euros.
Philips's new share buyback comes after 5.2 billion euros worth of shares had been repurchased since 2005 and 6.5 billion euros of acquisitions completed or announced in the same period.
"Philips is well under way to achieve its goal of an efficient balance sheet before the end of 2009," Philips' Chief Executive Gerard Kleisterlee said in a statement.
Philips is reorganizing its business to focus on consumer electronics and medical products after selling its semiconductor business last year.
On Tuesday, Philips said it wants to buy U.S. IT and service provider Visicu for $430 million to strengthen its healthcare unit. Last month, it announced plans to buy U.S. lighting maker Genlyte for $2.7 billion, its largest-ever acquisition.
Philips is the world's biggest lighting maker, a top three hospital equipment maker and Europe's biggest consumer electronics producer.