PALO ALTO, Calif. (TheStreet) -- VMware's (VMW) - Get Report deal with Yahoo! (YHOO) to acquire email specialist Zimbra looks set to boost the virtualization giant's cloud story, while ramping up competition with arch-rival Microsoft (MSFT) - Get Report.

Previously an independent division within Yahoo!, Zimbra makes email and collaboration software that will now

be built into VMware's

vSphere cloud technology

. An alternative to Microsoft's SharePoint and

IBM's

(IBM) - Get Report

Lotus Notes, Zimbra's open source software is already used in more than 55 million mailboxes.

Cloud services, which offer compute power or data storage via the Internet, have been

gaining momentum recently

, with companies such as

Amazon

(AMZN) - Get Report

, Microsoft and IBM all

pushing

it as a way for firms to avoid the upfront costs of hardware and software.

VMware CEO Paul Maritz highlighted the massive

importance

of cloud computing in a recent interview with

TheStreet,

citing users' desire to reduce the IT infrastructure within their businesses.

VMware is also boosting its presence with small- to medium-size businesses through the Zimbra deal, according to Todd Weller, an analyst at Stifel Nicolaus.

"

Zimbra's solutions are largely used by SMBs and service providers that offer hosted e-mail solutions," he wrote in a note released Wednesday. "If you use

Comcast

or Yahoo!'s Web mail, you are using Zimbra."

Although the financial terms of the Zimbra deal have not been disclosed, Weller says that the competitive ramifications are significant.

"Competition between VMware and Microsoft was already intense and this will take it up another notch," he said, maintaining his 'hold' rating on VMware's shares. "VMware is also making more moves in open source, which is

Red Hat's

(RHT) - Get Report

wheelhouse."

Under the terms of the deal, which is expected to close in the first quarter, VMware will purchase Zimbra's technology and intellectual property. Yahoo! will continue to use Zimbra's offerings in its own communications services.

Charles King, principal analyst of technology research firm Pund-IT, warns that Zimbra poses a host of challenges for VMware, the biggest of which means trying to succeed where Yahoo! failed.

"More important is how the acquisition will be seen by the vendors against whom Zimbra will compete," said King, adding that Microsoft is the 800-pound gorilla in this space. "Waltzing with other long-time allies that have a stake here, including IBM, will require VMware to exercise levels of finesse that could qualify the company as a finalist in 'So You Think You Can Dance.'"

Shares of VMware dipped 20 cents, or 0.45%, to $44.43 in midday trading Wednesday, as the Nasdaq gained 0.1%. Yahoo!'s stock gained 13 cents, or 0.78%, to reach $16.81.

-- Reported by James Rogers in New York