Publicis struck a $530 million deal with Microsoft to buy the Razorfish ad agency and boost its position in digital communications, the world's third-largest communications group said on Sunday.

Publicis will issue 6.5 million treasury shares to the software giant, worth 162 million euros ($232.6 million) at Friday's closing price, and pay the rest in cash from its ample liquidity position.

The two firms, which concluded a cooperation deal in June, also signed a strategic alliance agreement to deepen their ties in digital advertising while Microsoft uses Bing as its battleship in the search engine war with Google Inc..

Publicis is already the number one in digital advertising and Razorfish was number two in the single advertising sector that still shows growth rates despite the economic crisis.

The group, based in Paris, beat Britain's WPP Plc and Japan's Dentsu Inc. in the final bidding from an original field of some eight parties interested in the Microsoft unit.

The price paid was the result of an auction process, Publicis chief executive Maurice Levy told reporters on a telephone conference from the south of France.

He said the transaction valued Razorfish at some 1.4 to 1.5 times the revenues, which he called in line with sector deals.

He added Publicis did not plan any more acquisition of this size in the sector, but would look at any opportunities.

Any of these deals would be smaller-sized acquisitions

At end June, Publicis had 3.5 billion euros in liquidities.

The transaction means that Publicis will generate 25 percent of its sales from the digital sector, up from 21 percent at the half-year stage, a figure Levy originally targeted for end-2010.

Publicis is the world's third-largest advertising group with ad agencies such as Leo Burnett, Saatchi & Saatchi, media buyers Starcom MediaVest Group and ZenithOptimedia while in digital advertising it owns Digitas.

Razorfish was founded in 1995 and became part of Microsoft in 2007 as part of the $6 billion aQuantive acquisition.

Its clients include Best Buy, Ford, McDonald's, Microsoft and Starwood Hotels.

MICROSOFT REMAINS BIGGEST CLIENT

Microsoft is the biggest client and under the agreement Razorfish will remain the preferred provider while Microsoft will spend a minimum amount for services.

This is part of a wider five-year agreement in which Publicis buys display and search advertising from Microsoft at attractive terms in return for minimum guaranteed purchases.

Publicis has a pact with Google since January 2008 and Levy said the two alliances would work side by side.

The Publicis shares the French group will transfer to Microsoft will be valued at the average share price of 20 trading days before the closing of the transaction.

It will give the Redmond-based software group a stake of some three percent in Publicis.

Its biggest holder is the founding Bluestein-Blanchet family of chairwoman Elisabeth Badinter with 15.5 percent, followed by Dentsu with a stake of 14.8 percent.

Publicis has a market value of 4.88 billion euros while the market leader by revenues, WPP, has a market value of 5.86 billion pounds ($9.82 billion). World number two Omnicom Group Inc has a market value of $11.2 billion.

($1=.6966 euros)

($1=.5966 pounds)

(Additional reporting by Cyril Altmeyer; Editing by Mike Nesbit)

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