The deal represents a premium of of over 30 percent based on the companies' unaffected shares price as of Oct. 28, Pfizer and Allergan said in a joint release.
"Through this combination, Pfizer will have greater financial flexibility that will facilitate our continued discovery and development of new innovative medicines for patients, direct return of capital to shareholders, and continued investment in the United States, while also enabling our pursuit of business development opportunities on a more competitive footing within our industry," Pfizer Chief Executive Ian Read said.
The deal, the largest ever in the health care sector, is sure to draw political ire in a U.S. presidential election year because Pfizer would redomicile to Ireland, where Allergan is registered, in a so-called "inversion" that would slash its corporate tax rate.
"Given the price tag we're seeing them pay for Allergan, I think it's tough to justify without the tax benefits. There's a bit of strategic overlap; there would be so accretion and it adds to Pfizer's growth, but it really is that tax benefit at the end of the day that Pfizer's been very vocally pushing for," Vamil Divan, an analyst at Credit Suisse, told CNBC's " Squawk Box ."
It also reignites debate in the pharmaceutical industry over the role of research and development, with Allergan Chief Executive Brent Saunders, a prolific dealmaker and a skeptic of in-house drug discovery, joining the combined company in a position to influence its strategy.
The deal involves Pfizer paying with 11.3 of its shares for each Allergan share, sources told Reuters. There will also be a small cash component, accounting for less than 10 percent of the value of the deal, the people said.
Pfizer's Chief Executive Ian Read, 62, will be CEO of the combined company, with Allergan's Saunders, 45, serving in a very senior role focused on operations and the integration, the people added.
Saunders will also have a seat on the combined company's board, one of the people said.
— Reuters contributed to this report.