Yahoo Inc. is buying e-mail service Zimbra Inc. for $350 million US in an all-cash deal that may open a new revenue channel for the slumping internet icon.

The acquisition represents Yahoo's second significant expenditure this month as co-founder Jerry Yang spearheads an effort to breathe new life into the Sunnyvale-based company.

Two weeks ago, Yahoo disclosed plans to buy an internet direct-marketing network, BlueLithium, for $300 million US.

That purchase marks another step in Yahoo's attempt to sell more advertising on other websites besides its own, hoping to boost its sagging profits.

With the Zimbra purchase, Yahoo appears poised to branch in a new direction that may intensify the company's already fierce competition with rivals Microsoft Corp. and Google Inc.

San Mateo, Calif.-based Zimbra specializes in selling e-mail software and hosting services to businesses, universities and internet service providers.

That's something Microsoft has been doing for years with its Exchange platform.

Google entered the market earlier this year when it began offering e-mail accounts to businesses as part of a software bundle that costs $50 US per user annually.

"My guess is that this deal is partly a response to Google," said e-mail analyst David Ferris.

Hosted e-mail a hard sell

Zimbra's customers include one of the largest internet service providers in the U.S., Comcast Corp., as well as several well-known companies, including H&R Block Inc. and Raytheon Corp., and prominent schools such as UCLA and Georgia Tech.

For the most part, though, Ferris said Zimbra has had trouble getting companies to buy its hosted e-mail service.

Privately held Zimbra doesn't disclose its revenue. Ferris estimated Zimbra's annual revenue range between $10 million and $20 million US, figures that indicate Yahoo is paying a steep price.

Founded in 2003, Zimbra employs more than 100 workers. Its chief executive and co-founder, Satish Dharmaraj, plans to remain with Yahoo after the deal closes in the fourth quarter. The fate of Zimbra's brand hasn't been determined.

Besides providing Yahoo with a springboard for selling e-mail services to companies and universities, Zimbra also could provide tools to add more bells and whistles to the free, web-based e-mail service that Yahoo has been peddling to consumers for the past decade.

After buying a startup called Oddpost in 2004, Yahoo drew upon some of the technology it gained in the deal to upgrade its free e-mail service.

Losing traffic

"Zimbra's tremendous talent and innovative technology will help to extend our core mail offerings, further strengthening our strong leadership position in this space," said Yang, who took over as Yahoo's CEO three months ago after chairman Terry Semel relinquished the job amid deepening investor discontent.

Yahoo's free e-mail service recently has been losing traffic, according to the research firm comScore Media Metrix.

In August, Microsoft's Live Hotmail service attracted 255.3 million visitors worldwide to eclipse Yahoo's e-mail traffic of 254.9 million, which represented a one per cent decrease from the same time last year, Media Metrix said.

Google's Gmail ranked a distant third at 82.9 million worldwide visitors, up 64 per cent from last year. Google opened its e-mail service to all comers seven months ago.