Standard Life said in a statement it will buy Aberdeen for £3.8bn to create the UK's largest fund manager with assets under management of more than £660bn.
The proposed deal values each Aberdeen share at 286.5p, a 0.10 pence premium to its closing price of 286.40p on Friday. Aberdeen shareholders will have a 33.3% stake in the merged group while Standard Life's shareholders will own 66.7%.
The deal is subject to approval from shareholders. If approved the combined company will be based in Scotland with Standard Life chairman Gerry Grimstone as chairman and Aberdeen chairman Simon Troughton as deputy chairman.
Standard Life said the combined group will be branded to incorporate both the companies' names in due course.
Under thet terms of the merger, Standard Life shareholders will receive the proposed dividend of 13.35p per share for the six months to 31 December 2016 while Aberdeen shareholders will be paid a dividend of 7.5p each for the half year to 31 March 2017.
Ryan Hughes, head of fund selection at AJ Bell said: “The proposed merger between Standard Life and Aberdeen makes strategic sense for both parties. Aberdeen has been overly reliant on Asian and emerging markets for a long time and this has created significant volatility in its business performance, while Standard Life will see those Asian and emerging market assets as very complimentary to its fixed interest and UK asset base.”
However, Hughes thinks investors can expect a period of uncertainty throughout a long duration of fund range consolidation as the combined company looks to cut costs. Until more news becomes available, investors would be wise to stay patient, the analyst said.
“This merger is a continuation of consolidation in the asset manager industry and I would expect to see more as the market appears to move towards huge combined groups or small specialist boutiques.”
ETX Capital senior market analyst, Neil Wilson, said the deal makes "perfect sense" as a defensive play. Last week Aberdeen recorded its 15th consecutive quarterly outflow of assets, totalling £10.5bn in the three months to 31 December. Assets under management at the end of the first quarter were £302.7bn, down 3% from £312.1bn at the end of September.
Aberdeen's shares have lost 44% of its value since its high point in April 2015.
Standard Life's shares have fallen by 24% since its peak in May 2015. In February the group reported net outflows of £2.6bn in 2016, though assets under management rose 16% to £357.1bn.
The merged company is reportedly set to cut 1,000 jobs and make overall savings of about £200mln for Aberdeen.
Wilson believes cost savings should be easy to deliver as back office systems can be merged and job losses seem certain.
"The explosive growth in passive investing trends has heaped pressure on active managers like Aberdeen and Standard Life and consolidation had to be on the cards."
Shares in Standard Life jumped 5.81% while Aberdeen advanced 4.57% in morning trading.
-- Adds details of deal agreed, number of job cuts expected and analyst comments, updates share price --