Ascena Retail Group Inc, which runs Dressbarn and Lane Bryant women's clothing stores, said it agreed to buy rival Ann Inc, owner of LOFT and Ann Taylor, for $2.15 billion.
Ann, which like Ascena targets women in the 20-to-40 age group, has been hit hard by increasing competition from fast-fashion chains and a pullback in discretionary spending.
Reuters reported in August last year the company, which has been under pressure from certain shareholders to sell itself, had tapped JP Morgan to explore a sale.
Ascena said it would offer $47 per share - $37.34 in cash and 0.68 in stock - for each Ann share.
Ann's shares rose nearly 21.5 percent to $47.05 in premarket trading. The stock has been trading above the offer price on Monday, indicating some investors were hoping for an increased bid or a rival offer.
Ascena's shares were up 7.7 percent at $15.30.
The transaction gives Ann, best known for its women's suits and office wear, an enterprise value of about $2 billion, Ascena said in a statement.
Ann's shareholders, hedge funds Engine Capital LP and Red Alder LLC, had in August asked the company to consider selling itself, while its largest investor Golden Gate Capital LLC has said the stock was undervalued.
Ann's same-store sales have fallen in three of the past four quarters. The company's problems have been compounded by disruptions at West Coast ports, which has hit sales and led to higher costs in the past two quarters.
Ascena said it expects the deal to be "significantly accretive" to earnings in the first year after the deal closes and to boost profit by more than 20 percent after that. The deal is expected to close in the second half of 2015.
Up to Friday's close, Ann's shares have fallen 3 percent since Aug. 26, when Reuters reported the company was mulling a sale.
Guggenheim Securities and Goldman Sachs are advising Ascena, while JP Morgan is advising Ann. Ascena's legal adviser is Proskauer Rose LLP, while Ann's is Wachtell, Lipton, Rosen & Katz. (Reporting by Ramkumar Iyer in Bengaluru; Editing by Savio D'Souza)