Consulting firms Towers Perrin Forster & Crosby and Watson Wyatt Worldwide
Under terms of the deal, Watson Wyatt shareholders will receive 50 percent of the shares in the combined company, which will be named Towers Watson & Co.
Towers Perrin shareholders and some designated employees will be entitled to the other 50 percent of the shares, though on a restricted basis.
It was unclear which company would own the other.
Watson Wyatt Chief Executive John Haley will be chairman and CEO of the combined company. Watson's Chief Financial Officer Roger Millay will hold the same title at the new company.
Towers Perrin's Chief Executive Mark Mactas will serve as president and chief operating officer of the new company.
It will take three years to achieve savings of $80 million through job cuts and the streamlining of overlapping operations, and the companies expect one-time costs of $80 million from the merger and significant noncash expenses for the first two years.
In an interview with Reuters, Watson's Haley and Towers' Mactas declined to provide much detail on the deal, including the earnings multiples on the transaction or where the new headquarters would be.
Haley said the combined companies' headquarters would not be located at either of the current locations, but it will be in the U.S. Northeast.
Watson Wyatt's headquarters are in Arlington, Virginia while Towers Perrin makes its headquarters in Stamford, Connecticut.
Both chief executives told Reuters that a large chunk of the synergies would come from North America, which accounts for 65 percent of the revenue at Towers Perrin and 45 percent at Watson Wyatt.
We expect that to come from combining management teams and general administrative expenses, Haley said. He added there would be job cuts, but said he had no further details.
Mactas said savings would also be realized as the companies combined finance, accounting and sales platforms. We also have a lot of real estate that we lease around the world, and over time we'll co-locate, we'll do that in an efficient manner.
The deal could cause a potential conflict of interest if the new company provides executive compensation consultancy to the same clients that provide the company millions of dollars in revenue for employer benefits consultancy services.
The subject of executive compensation has become more controversial in the past few months, coming under intense scrutiny by the U.S. government in light of recent federal bailouts.
The deal, which will create a combined company with annual revenue of more than $3 billion and a possible workforce of more than 14,000 employees, could put pressure on rivals such as Hewitt Associates
The deal comes after Watson Wyatt last month lowered its profit and revenue outlook for the full year, saying projects directly tied to helping clients manage costs, mitigate risks or meet regulatory requirements were doing well but divisions which rely on shorter-term, more discretionary contracts, were hurt by the slowdown in the economy.
At the time, CFO Millay said the company expected demand for services in its human capital group -- which covers executive pay and talent management -- to continue to decline. Revenue from that group fell 25 percent in the third quarter.
Watson shares have fallen more than 20 percent since May. They closed at $41.18 in Friday trade on the New York Stock Exchange.
Watson Wyatt will designate four of its six current independent board members to the new company's board, and add another internal company executive, Haley said, who will also be on the new company's board.
Towers Perrin will also name four of its independent directors to the new board, which will also have Towers' Chief Executive Mark Mactas and one internal nominee.
(Editing by Maureen Bavdek, Gary Crosse and Phil Berlowitz)