The Merck-Serono deal follows agreements struck with giants such as Pfizer and GlaxoSmithKline as smaller companies combine resources and knowledge in a bid to maintain competitive.
Analysts have also expressed surprise at the timing of the deal, having come so soon off the back of a failed attempt to purchase German-based firm Schering.
In an attempt to reinforce its European drugs portfolio, Merck had launched a €14.6bn hostile bid assault on Schering in March of this year. Bayer wrecked the deal by winning management approval for its improved €16.3bn offer.
This latest deal appears to have been worth the wait and effort as the purchase makes Merck the seventh largest drug group in Europe.
Serono will become Europe's largest biotechnology company with pro forma 2005 sales of €7.7bn, including €3.6bn in bio-pharmaceutical sales
Under the terms of the agreement, Merck's Pharma Ethicals division will be combined with Serono to create Merck-Serono Biopharmaceuticals with headquarters of this business based in Geneva, Switzerland.
Additionally, Merck, is to pay SwFr1,100 a share for the 64.5 per cent stake held by the Bertarelli family, and will make a public tender for the rest of the shares in November.
"Both companies have a unique opportunity to achieve a competitive advantage through a combined €1bn R&D budget and a stronger product portfolio," said Michael Roemer, chairman of the Executive Board of Merck KGaA.
"The companies are a perfect fit with 28 compounds in development," he added.
The deal will give Merck, whose products include the cardiovascular treatment Concor and the cancer drug Erbitux, access to new markets.
For example, Serono is in partnership with Pfizer to market Rebif, the leading product outside the US for treatment of multiple sclerosis.
"With this transaction we create a combined business with strong capabilities, especially in neurology and oncology," said Ernesto Bertarell, Serono chief executive.
"This match will allow Serono's biotech abilities to play an important role in the future of the combined company while expanding its global reach."