Rumors of the combination persisted in recent days but both companies steadfastly declined comment.
The new company will operate under the name and Web address of "Egghead.com" with auctions and sales of surplus goods under the Onsale banner.
"I think it's pretty clear to all of us that it's a merger of equals," said Phil Leigh, analyst at Raymond James and Associates. "Onsale is getting a stronger brand name with Egghead. Egghead has a lot of cash--$160 million in cash with the combined companies."
Expect more mergers of equals in the space, rather than flat-out takeovers, Leigh added.
"Investors can no longer assume that a takeover will result in a premium," he said.
Leigh said that smaller firms cannot stand alone and expect to build the brand and momentum necessary to be market leaders, noting CDNow's merger with Columbia House, announced yesterday, as yet another example of a merger of necessity that will also help the companies compete better against Amazon.
The Onsale merger is expected to help Egghead, which moved online last year after tackling falling sales and profit as a bricks-and-mortar software retail chain. Recent rumor had it that Amazon was interested in buying Egghead, but talks between the two companies had fallen through.
The deal also comes at a time when the companies' competitors are struggling in an industry facing rapid consolidation under slim profit margins and increasing competition.
"I think it's a defensive move on both their parts," said Forrester Research analyst Seema Williams. Williams said Egghead "lost sight of what they were doing" after they closed their offline stores, and tried to be too many things to too many people by selling everything from jewelry to hardware at auctions and surplus closeouts the company hosted online.
"They haven't really figured out their business model," she said, adding that Onsale, which sells computers and a host of other related equipment, has stumbled as well.
Onsale's share value has fallen 65.5 percent since January, while Egghead lost two-thirds of its share value between last November and June.
As partners, the companies will need to hammer out a business model and better meet customer needs, something neither of them are doing today, Williams said.
Meanwhile, the companies' competitors are also struggling. Cyberian Outpost, for example, as of last month had seen its stock price plummet by more than 70 percent since January.
Under the Onsale-Egghead merger, Egghead chief executive George Orban will become chairman of the combined companies and Onsale CEO Jerry Kaplan will be CEO. The company will be based in Menlo Park, where Onsale is based, with offices in Vancouver, Washington. Egghead is based in Vancouver.
The deal will be tax free and treated as a pooling of interests, both companies said.