But details of what will happen to thousands of jobs in Edinburgh and Scotland remain unclear.
Standard Life employs over 8,000 and Aberdeen has over 2,800 staff.
Shares in Standard Life rose 7% in morning trading, while Aberdeen was up 5.3% on news of the merger..
The deal will create one of the world’s industry powerhouses, overseeing £660 billion worth of global assets.
Under the terms of the potential merger, Aberdeen shareholders would own 33.3% and Standard Life shareholders would own 66.7% of the combined group.
However, it is thought several hundred jobs are at risk in Scotland and in the City as the duo pointed to cost savings that could add up to £200 million.
Keith Skeoch, chief executive of Standard Life, said: “We strongly believe that we can build on the strength of the existing Standard Life business by combining with Aberdeen to create one of the largest active investment managers in the world and deliver significant value for all of our stakeholders.”
Following completion of the merger, which values Aberdeen at £3.8 billion, Standard Life chairman Sir Gerry Grimstone will become chairman of the combined entity.
Mr Skeoch and Aberdeen boss Martin Gilbert will become co-chief executives of the new firm.
The companies said the deal was still subject to a number of conditions, including shareholder approvals, but recommended that investors vote the deal through.
The new firm will have its headquarters in Scotland and Mr Gilbert said the move will enable the enlarged business to “compete effectively on the global stage”.
Ryan Hughes, head of fund selection at AJ Bell, said: “The proposed merger between Standard Life and Aberdeen makes strategic sense for both parties.
“Aberdeen has been overly reliant on Asian and emerging markets for a long time and this has created significant volatility in its business performance, while Standard Life will see those Asian and emerging market assets as very complementary to its fixed interest and UK asset base.
“If the merger goes ahead, investors can expect a long period of fund range consolidation as the combined group looks to cut costs.
“This could create a period of uncertainty but until more news becomes available investors would be wise to stay patient.”