Google is continuing its late-year spending spree, today unveiling its agreement to purchase Teracent, a startup that specializes in algorithms to serve custom display ads.

The San Mateo, Calif.-based startup has developed machine-learning algorithms that mix and match different elements of an advertising creative to serve, in real time, tailored ads that boast far greater relevance than the traditional, one-size-fits-all banner ad.

“We think that this technology has great potential to improve display advertising on the Web,” Google Vice President Neal Mohan and Engineering Director Joerg Heilig wrote in a blog post announcing the deal.

The acquisition fits into Google’s plans to bulk up its presence in display advertising, a market led by Yahoo, and crowded with other online heavyweights such as AOL and Microsoft.

Search advertising still accounts for the lion’s share of Google’s revenue, but the company has been talking loudly about its interest in the display business, which was the driving force behind its $3.1 billion acquisition of the mega-ad network DoubleClick.

Google has launched rolled out several products and features targeting the display market since the DoubleClick acquisition, including the recent launch of an ad exchange aimed at simplifying the process of connecting buyers and sellers.

With the Teracent acquisition, Google plans to integrate the firm’s algorithm-based technology into its display business to serve smarter ads on the fly.

“Teracent’s technology can pick and choose from literally thousands of creative elements of a display ad in real-time — tweaking images, products, messages or colors,” Mohan and Heilig said. “These elements can be optimized depending on factors like geographic location, language, the content of the Web site, the time of day or the past performance of different ads.”

The Teracent buy follows Google’s recent purchases of On2 Technologies, a video-compression technology firm, VoIP provider Gizmo5 and mobile ad-tech firm AdMob for $750 million.

When the company reported its earnings for the third quarter, executives said they felt they were past the worst of the economic downturn, telling analysts that they intended to return to a more aggressive acquisition strategy.

Google said it expects the Teracent deal to close before the end of the year. Financial terms of the transaction were not disclosed.

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