The transaction, which is expected to be completed mid-2016, will create a global biotechnology firm focused on rare diseases.
The combined company will provide a foundation for hematology and oncology business. It will also focus on immunology; neuroscience; lysosomal storage diseases; gastrointestinal/endocrine; and hereditary angioedema.
Under the deal, Baxalta shareholders will receive $18 in cash for each share and 0.1482 Shire American depositary shares.
Upon completion of the deal, Baxalta holders will have a 34% interest in the combined company.
Baxalta CEO Ludwig Hantson said: "This transaction presents a unique opportunity for Baxalta shareholders, who will receive substantial immediate value as well as an ongoing stake in a combined global leader in rare diseases with strong growth prospects."
Shire CEO Flemming Ornskov said: "Together, we will have leadership positions in multiple, high-value franchises and become the clear partner of choice in rare diseases.
"Our expanded portfolio and presence in more than 100 countries will drive our growth to over $20 billion in anticipated annual revenues by 2020."
The combined portfolio will have an extended range of therapeutic areas with over 60 programs in development, including more than 50 that will address rare diseases and several newly-approved products of Baxalta.
The merger is expected to generate annual cost savings of over $500m within the first three years.
Warwick Business School professor of Practice in the Entrepreneurship & Innovation Group John Lyon said: "It is always good to see deals that make good strategic sense and this is one of them.
"Shire has set out its future as a global leader in rare diseases and this deal augments that strategy with Baxalta – another specialist in rare diseases – having expertise in bleeding disorders, immunology and oncology.
"The deal is hardly a surprise. Last year Shire sought a deal as a stock purchase and were rebuffed. In the courting process, they put forward an improved offer with a 40% cash component, increasing the value from $45 per share to $48 per share."
Image: Shire location in Lexington Massachusetts, US. Photo: courtesy of John Phelan.