It said it will likely relocate its global headquarters from New York to Ireland, a move that will cut the drug giant's U.S. tax burden.
The deal represents a premium of over 30 percent based on the price of the companies' unaffected shares as of Oct. 28, Pfizer and Allergan said in a joint statement.
Pfizer stock was down 2.6 percent Monday afternoon, and share prices of Allergan were down 2.2 percent.
"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 CEO Ian Read said.
Allergan shareholders will receive 11.3 shares of the combined company — Pfizer PLC — for each Allergan share, while current Pfizer shareholders will receive one share of the new company for each share they own.
The deal, the largest ever in the health care sector, is expected to close in second half of next year. Pfizer said it expects to redomicile to Ireland, where Allergan is registered. The latest such "inversion" would slash its Pfizer's corporate tax rate from 40 percent to 12.5 percent.