Alcatel-Lucent shareholders will own 33.5% of the new combined firm, and Nokia shareholders 66.5%.
The deal is expected to close in the first half of 2016. The combined company hopes to cut €900m in operating costs by 2019, and make $200m in reductions on interest expenses by 2017, the two companies said in a statement.
The combined company, called Nokia Corporation, will bring together Alcatel-Lucent's Bell Labs with Nokia's FutureWorks creating "unparalleled innovation capabilities", the companies said.
The merger reflects an overall trend towards consolidation in the telecommunications market, both at the operator and the supplier level, said telecoms expert Frederic Ichay of Pinsent Masons, the law firm behind Out-Law.com.
"Operationally, it will be positive, as the need for investment in research and development in the telecoms is more and more demanding," Ichay said.
Nokia will need to shift its service offering towards new technologies, including the internet of things and cloud computing, and "will have to move very quickly not to miss this transition," he said.
The companies will also face a number of challenges in merging, Ichay said.
Alcatel's merger with Lucent in 2006 "has been, to some extent, a failure," he said, as the company has struggled to bring together its French and US operations.
"It was supposed to be very complimentary in terms of geography, of technology, and strategy, but there has been a lot of duplication of sites and of R&D – essentially competing against one another," Ichay said. "It was a challenge to merge the French and the American operations, and now the company will be trying to merge a Franco-US operation and a Finnish one."
"It remains to be seen whether they can find a way to work together and create value together. There will also need to be a very serious cost cutting programme. They say that they aim to cut almost a billion dollars a year through synergies, but integration will cost a lot, and they will need to invest a great deal in R&D, so they will have to cut costs as much as they can if they are to retain some profits," he said.
This move is in fact more of a takeover than a merger of equals, with Alcatel-Lucent shareholders retaining only one third of the shares, Ichay said. While Alcatel-Lucent shareholders are getting a 28% premium on the market value of their shares, "which is a good deal, given the situation", they will shortly lose control of the company, he said.
Nokia sold its mobile phone business to Microsoft last year in a €5.44 billion deal. The move signaled Nokia's intention to focus on its other businesses, which include network infrastructure software, hardware and services, location intelligence, and advanced technology development and licensing.
Alcatel-Lucent has also been refocusing itself in recent times, in an attempt to become "an IP networking and ultra-broadband specialist". It sold its enterprise business to China Huaxin in a €202 million deal last year, and had previously outlined its aim to raise at least €1 billion from "selective asset sales" by the end of 2015.