After several months of speculation the two companies announced they would join to create one new company generating annual pre-tax profits of at least £75 million.
The combined company will be called the Thomas Cook Group, based in the UK and listed on the London Stock Exchange.
It will be managed on an interim basis by joint chief executives Peter McHugh, chief executive of MyTravel, and Manny Fontenla-Novoa, chief executive of the Thomas Cook Group.
Thomas Cook parent KarstadtQuelle will own 52% of the new company while MyTravel shareholders will have a 48% stake.
The merger is subject to approval from the anti-trust authorities and MyTravel shareholders as well as the completion of the recently announced Lufthansa deal.
Thomson has made great strides with its online strategy in recent years and is aiming to sell around 60% of products via the web.
It has also recently pledged to decrease the number of pre-packaged holidays and push users to create their own trips using individual flight and hotel components, a development Thomas Cook – one of the founders of the package holiday concept – has so far resisted.
The new Thomas Cook group said it had no plans to make a bid for the package holiday business of rival group First Choice, according to reports.
Michael Beckett, Chairman of MyTravel said: “This transaction gives MyTravel shareholders the opportunity to participate in the significant value creation being offered by industry consolidation.
“Thomas Cook is a household name and the joining of the two groups will create an even stronger force in this highly competitive market.”
Thomas Middelhoff, chief executive of KarstadtQuelle and chairman of Thomas Cook, added: “We are delighted to see the merger of two such well established industry players which we are sure will achieve significant value creation for us as shareholders from this geographically diverse portfolio of companies.
“The Thomas Cook team is looking forward to building and growing the enlarged group together with the MyTravel team.
“The combined organisations will offer customers unrivalled choice and quality for their holiday and leisure time in all of the markets in which we operate.”