The merger will take place through a public share exchange offer to Rautaruukki's shareholders with a 20-percent premium on the average share price of both companies over the last three months, amounting to 10.1 billion kronor ($1.56 billion).
"In the steel industry, a combination of SSAB and Rautaruukki has for long been considered logical and the time is now right to pursue this transaction," chairman of SSAB's board of directors Sverker Martin-Löf said in a statement.
The companies said that the resulting Nordic and US-based company would save 1.4 billion kronor per year thanks to a more efficient and flexible production.
"I believe that the combination of Ruukki and SSAB gives an excellent opportunity to continue the rationalisation of the cost base of the companies and build a new Nordic steel producer," Rautaruukki chief executive Sakari Tamminen said.
The firms, with approximately 8,700 employees each, said they would lay off around five percent of their workforce, mostly in Sweden and Finland, over a three-year period following the operation.
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Both firm's shares soared on Wednesday after the announcement.
In early trading, SSAB's shares were up by 15.43 percent on the Stockholm stock exchange in an overall market up 0.28 percent, while Rautaruukki's share price soared by 29.39 percent at the Helsinki stock exchange, where the main index was also up by 0.70 percent.