Sega did not provide financial details but said the merger with Sammy, Japan's largest maker of pinball machines for pachinko parlors there, would take place in October.
The deal will create a combined company worth about $2.4 billion, with Sega accounting for about 54 percent of that. Sammy President Hajime Satomi will lead the new entity.
Sega, one of the pioneers of the modern video game industry, has struggled in recent years. The companythe games hardware business in 2001, when it could no longer afford to subsidize its Dreamcast console.
Since then, Sega has set out on an ambitious track to become the leading third-party publisher of video games for all three major consoles--Sony's PlayStation 2, Nintendo's GameCube and Microsoft's Xbox. The company is best known for its "Sonic the Hedgehog" adventure games and sports simulations. Success has been elusive, however, especially in the critical U.S. market for football and other sports games, where Segaa distant second to Electronic Arts. Sega has also hoped to its early experience in online games, as major games makers scramble to embrace the Internet.
Sega has posted losses each of the past five years but still expects to squeeze out a net profit for the current fiscal year, which ends March 31. The company has repeatedly trimmed forecasts for the year ahead, however, announcing Thursday that it now expects to make $4.12 million, down from original expectations for a net profit of $148.4 million.
Peter Moore, former head of Sega's American division, recentlyto work in the Microsoft division responsible for the Xbox game console.
Reuters contributed to this report.