Dow Chemical (DOW) and Union Carbide (UK) said both companies' boards have approved a definitive merger deal for a tax-free, stock-for-stock transaction.
Union Carbide shareholders will be given 0.537 Dow shares for each share of Union Carbide they own, and will hold about 25 percent of Dow after the merger.
Shares of Dow fell 1 5/8 to 124 11/16 on Tuesday ahead of the news. Union Carbide rose 1/8 to 48 13/16.
Based on Tuesday's closing prices, the transaction is valued at $66.96 per Union Carbide share, or $11.6 billion including the assumption of $2.3 billion of net debt.
The merger will create a giant with combined annual revenues of more than $24 billion, operating income of $3 billion and a combined market capitalization of roughly $35 billion. The group will have assets valued at $30 billion.
The deal comes after lower margins in the chemical business bit into Union Carbide's second quarter profits.
The chemical industry, like other commodity sectors, has suffered from slack demand in economically depressed countries overseas and excess supply.
Danbury, Conn.-based Union Carbide's second-quarter profits slumped 52 percent when it reported earnings on July 26. The chemical manufacturer blamed higher raw material expenses and an inability to pass those costs onto customers.
The company said it earned $56 million, or 41 cents a share, a penny below the consensus estimate of analysts surveyed by First Call.
Last year, Union Carbide earned $118 million, or 85 cents. Sales fell to $1.42 billion from $1.46 billion a year earlier.
Last week, chemical stocks heated up Tuesday after PaineWebber boosted its stock ratings for Dow Chemical and Union Carbide.
But the company said demand is picking up in all of its segments, and the company expects to raise prices of basic chemicals and polymer goods, among other things.
The combined group will have operations in 168 countries, about 49,000 employees and rank at number 50 on the Fortune 500.
The companies said they'll save at least $500 million a year through the merger, and will slice 4 percent of their combined workforce - leaving them with a total of 49,000 employees.
In a statement, William S. Stavropoulos, president and chief executive of Dow, said the new group will be "well positioned for the next peak of the cycle" and that the deal will help the company "reach our ambitious financial goals, including annual EPS growth in excess of 10 percent across the cycle."
William Joyce, chairman and chief executive of Union Carbide, said: "This is the right move at a good time. In a consolidating chemical industry fewer, more powerful companies will exist." He said together the two companies will considerably improve their long-term growth prospects.
Written By Gareth Vaughan, CBS MarketWatch