UPDATE 1-Yahoo to buy Web e-mail maker Zimbra for $350 mln

(Adds acquisition details, executive comments, byline)

By Eric Auchard

SAN FRANCISCO, Sept 17 (Reuters) - Yahoo Inc (YHOO.O) said on Monday it would pay about $350 million for Zimbra, a maker of Web-based mail, calendar and collaboration software that competes directly with products from Microsoft Corp (MSFT.O) and Google Inc (GOOG.O).

Executives of both companies said in an interview the cash and stock deal would allow Yahoo to offer new e-mail services to universities, businesses and consumers via Internet service providers like Yahoo e-mail customers AT&T (T.N) or BT (BT.L).

Zimbra software, which also includes a program for managing contact details, runs on the Web but offers a level of user control previously only found in desktop computer software.

The Yahoo executive in charge of the deal said he was particularly impressed by Zimbra's advanced calendar features.

"We view this acquisition as furthering our leadership in an area where we have been a category leader," said Brad Garlinghouse, senior vice president of communications and communities at Yahoo.

Zimbra will enhance its decade-old Yahoo Mail, the world's largest consumer e-mail service with 250 million accounts.

Garlinghouse said it was just the latest acquisition his company has made to become the preferred Internet media partner for other industries, building on deals with eBay Inc (EBAY.O), Comcast and a newspaper consortium. Recent Yahoo acquisitions include advertising companies Right Media and BlueLithium.

Highlighting the two companies' overlapping strategies is a deal Zimbra struck in May with top U.S. cable operator Comcast Corp (CMCSA.O) to provide e-mail and voice messaging services to Comcast's 12 million high-speed Internet subscribers.

The closely held company, based in San Mateo, California, made a splash two years ago at a Web 2.0 conference in San Francisco by demonstrating a new generation of Web-based e-mail that could be made to look and act like Microsoft Outlook.

"The first time I saw Zimbra I was wowed," said Garlinghouse, who was present at the product demonstration, which has become something of a local legend. Merger discussions with Zimbra picked up early this summer, he said.

In the six quarters since Zimbra started shipping its suite of collaboration software tools, the company has signed up 1,300 organizations serving 9 million e-mail customers, said Satish Dharmaraj, Zimbra's co-founder and chief executive.

Zimbra competes with Google's Gmail in the higher-education and business market where the start-up company's focus on features desired by big business and the flexibility of its technology gives it advantages over consumer-focused Gmail.

After the deal closes, expected in four to six weeks, Zimbra will become a wholly owned unit of Yahoo. Dharmaraj will lead Zimbra's nearly 100-employee team from Yahoo headquarters in Sunnyvale, California, reporting to Garlinghouse.

Dharmaraj helped pioneer the current field of mobile communications as vice president of messaging at Openwave Systems (OPWV.O). He was part of the team that sold unified messaging service Onebox to Phone.com to form Openwave.

Zimbra President Scott Dietzen led development of the Java standard now widely used in building software for businesses.

The acquired company also gives Yahoo a software platform based on "open source" principles, making it easy for customers to integrate Zimbra software with other business software.

"I have been incredibly impressed that these guys go head-to-head with much larger competitors and are winning an amazing amount of the time," Garlinghouse said of Zimbra's competition with the likes of Google, Microsoft and IBM.

Zimbra also offers technology it calls Zimlets that give users the power to combine different Web services such as online maps or Web-based package-tracking notification with its e-mail system to create hybrid applications known as mash-ups.

Zimbra counts as customers both universities and Fortune 1000 enterprises, particularly in financial services, retail, and manufacturing. It was backed by Silicon Valley venture firms Benchmark Partners, Redpoint Ventures and Accel Capital.

Shares of Yahoo traded at $24.97 in after-hours trading, virtually unchanged from their regular-session Nasdaq close.

(Additional reporting by Yinka Adegoke in New York)