Philips said on Thursday it was laying the ground for acquisitions as fourth-quarter earnings exceeded expectations, but added that it would continue to divest activities to reduce volatility in its consumer electronics division.

The company also said it would buy-back up to €750m in shares in the next six months - for capital reduction and to hedge share and option plans - and raised its dividend from €0.36 cents and €0.40 cents.

Shares gained 5.2 per cent €19.64 in afternoon trading in Amsterdam, buoyed by confirmation that its medical systems unit - its growth priority - had surpassed a 14 per cent operational margin target, compared to 11.9 per cent in 2003.

Jan Hommen, who will retire in April after eight years as chief financial officer, said: "We are building a base for growing the company and making acquisitions."

Those will be mainly in healthcare, although Philips is looking too for takeovers in lighting and domestic appliances, which makes coffee machines and toothbrushes. With 2004 sales of €5.9bn, its medical unit is Philips' second largest division after consumer electronics, with €9.9bn.

The company has near to zero net debt, after reporting €3.35bn in cash flow before financing activities in 2004. It raised €2.1bn from the sale of securities - including stakes in Vivendi Universal, Atos Origin and ASML - and from IPO proceeds, for a war-chest that already includes €1.5bn from securities sales in 2003. It still owns stakes worth €11.5bn in companies including TSMC and LG. Philips LCD.

Analysts have cautioned Philips not to over-pay for acquisitions. The company will also be mindful of the lessons from the acquisition in 2000 of 71 per cent of Medquist, a US medical services company, where a billing practice investigation triggered a write-down that cost Philips €576m in the fourth-quarter.

A number of one-off charges, of which that was the biggest, meant fourth-quarter income from operations fell to €14m from €608m in 2003. Net income fell 16 per cent to €498m or €0.39 per share. It was €2.83bn for the year, triple 2003 on sales 9 per cent higher at €30.3bn.

However analysts had been braced for worse, amid oversupply of electronics products, chips and flat screen televisions and lower selling prices.

Gerard Kleisterlee, whose term as chief executive is likely to be extended to the end of 2008, said he was optimistic about 2005, despite caution over the oil price, European economic prospects and the dollar.

However he was clear that further work was needed in consumer electronics, although its US unit was profitable in 2004 for the first time in 15 years. "The name of the game for consumer electronics is to grow margins, and this may have consequences for the portfolio," he said. "We will drive the areas that have good margins and divest or de-emphasise those that do not."

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