Publicis Groupe SA (PUB.FR) Sunday said it will acquire Microsoft Corp.'s (MSFT) digital advertising agency Razorfish for $530 million, a move that allows the French advertising company to reach its digital revenue target earlier than expected and will solidify position in the only sector still growing amid the current ad slump.

The acquisition of the last large digital agency up for grabs is part of a five-year strategic alliance between the two companies that will become effective when the transaction closes in the fourth quarter 2009, Publicis said.

Competition for Razorfish was fierce among advertising holding companies as they increasingly bet on digital activities to boost revenue. Advertisers have had to adapt to the shift of media spending away from traditional media to the Internet and have suffered, on top of that, from firms cutting budgets amid the economic crunch.

Paris-based Publicis, which owns agencies Saatchi & Saatchi and Leo Burnett, won the race against seven initially interested parties to beat Japan's Dentsu (4324.TO) in the final stage of negotiations, Publicis Chief Executive Maurice Levy told a conference call. According to the Wall Street Journal, rival WPP Group (WPP.LN) and Omnicom Inc. (OMC) had also expressed interest in the agency.

Publicis has made digital acquisitions a key strategy over the past years. In early 2007, it bought Boston-based Digitas for $1.3 billion, followed by the purchase of search-marketing agency Performics from Google Inc. (GOOG) last year, as well as a series of small agencies around the world. It has also closely aligned itself with technology giants to improve its expertise digital advertising.

"There is no more big-scale acquisition left to make in digital, Razorfish was the last one. And there aren't any in emerging markets. Thus one shouldn't expect Publicis to make further large acquisitions in the short or medium-term," Levy told the call.

"When we complete this transaction, approximately a quarter of our annual revenues will come from digital communications, and we believe we have more capacity to grow with new clients," Levy said in a statement. The group had targeted to make 25% of its revenue from digital activities by the end of 2010, compared with 20.8% at the end of June.

In the first half of this year, Publicis' digital activities still grew 5.7% on an organic basis, a closely watched metric stripping out acquisitions, disposals and currency movements, versus a 6.6% overall decline.

Publicis will pay for Razorfish with a combination of cash and 6.5 million of its treasury shares, the company said. Microsoft will hold about 3% of Publicis' capital after the deal, Levy said.

As part of the wider deal, Publicis' clients will be able to purchase display and search advertising from Microsoft on favorable terms, in exchange for certain minimum guaranteed aggregate purchase levels.

Microsoft is also committing to spending a minimum amount for digital marketing services with Razorfish each year, Publicis said. The agreement follows a partnership signed in June, when the companies said they will work together to develop new content, improve marketing performance and better target digital advertising audiences.

"There is no bias or no commitment to buy from Microsoft," David Kenny, managing partner of Publicis' digital initiative, Vivaki, said in the conference call after some ad executive voiced concern that such a pact could be seen as involving a conflict of interest, given an advertising company's role in seeking out the best deals for its clients.

Razorfish, which has about 2,000 employees and an estimated revenue of $370 million to $380 million this year, according to Levy, will continue to operate under its brand name and keep its management team as part of Vivaki.

The agency's biggest client is Microsoft itself, which acquired Razorfish when it bought its parent company, aQuantive, in 2007. Other clients include Ford Motor Co. (F) and McDonald's Corp. (MCD). The transaction is still subject to regulatory approval in the U.S., Publicis added.

Publicis shares closed Friday at EUR24.90, giving it a market value of about EUR4.9 billion.

Company Web site: www.publicisgroupe.com

--By Ruth Bender, Dow Jones Newswires; +33 1 40 17 17 40; ruth.bender@dowjones.com