Besides operating a large ad network, BlueLithium provides tracking technology, known as "behavioral targeting," that identifies Web surfers with particular interests so the ads they see will be more interesting to them. As an example of how this works, a person who had been looking up information about home loans on the Internet would be more likely to see ads about mortgages.
"We think this is the next logical step in our evolution," said Todd Teresi, senior vice president of Yahoo's publisher network. A long list of major advertisers, including General Motors, already rely on BlueLithium, Teresi said.
Both Google and Microsoft also are trying to supplement their advertising services through acquisitions. Microsoft last month completed a $6 billion takeover of aQuantive, while Google hopes to buy DoubleClick for $3.1 billion if it can gain approval of federal antitrust regulators.
Yahoo expects to complete the BlueLithium deal before the end of the year.
Privately-held BlueLithium says it became profitable three months after its 2004 inception. The San Jose-based company has about 135 employees scattered in 10 offices in the United States and Europe.
Once the kingpin of Internet advertising, Yahoo has been trounced by Google in recent years.
Yahoo's profit fell by nearly 7% to $303 million during the first half of this year, while Google's earnings soared 47% to $1.9 billion.
The disparity has dismayed investors, contributing to a nearly 40% drop in Yahoo's stock price since the end of 2005.
Wall Street's backlash prompted Yahoo Chairman Terry Semel to step down as chief executive in June and turn over the reins to company co-founder Jerry Yang.
Yahoo negotiated the Right Media acquisition while Semel was still CEO, so the BlueLithium deal represents the company's first major purchase under Yang's leadership. Yang has promised to provide further details about his turnaround plan when Yahoo announces its third-quarter earnings next month.
Several key positions in Yahoo's advertising operations already have been reshuffled under the management of its new boss, former chief financial officer, Susan Decker.