Germany's Sivantos, formerly known as Siemens Audiology, and Denmark's Widex will create a company worth more than 7 billion euros ($8.28 billion), including some 3 billion euros in debt.
Makers of hearing aids, whose customers are typically in their seventies or eighties, are benefiting from rising demand in ageing societies, but some are facing challenges adapting to the digital age and the demands of more tech-savvy generations.
"Innovation is one of the biggest areas of growth, and this is accelerating because we have a new group of consumers that is coming with a completely different mindset," Sivantos chief executive Ignacio Martinez told Reuters.
The merger would enable the company to invest more in research and development, he said.
Swedish private equity firm EQT will own a majority of the merged group in which the Tøpholm and Westermann families, who currently own Widex, will retain large stakes. EQT bought Sivantos from Siemens in 2015 for more than 2 billion euros.
The companies declined to comment on the relative valuation or to disclose the distribution of stakes. The deal was branded a "merger of equals", indicating that no cash was involved.
The combined group, whose name has not been decided, will have 1.6 billion euros in sales and employ more than 10,000 people worldwide, including 800 in R&D.
The merger pushes back EQT's plans for a stock market listing of Sivantos by a few years, as the focus will now be on integrating the companies and advancing their digital technology, a person close to the matter said.
"It is very possible that there will be an IPO, but the only thing we know is that we will continue to be a large shareholder," Widex chairman Jan Topholm told Reuters.
Sonova has been criticised for missing an opportunity when GN Store introduced direct-streaming hearing aids for wireless devices in 2014, but last year closed that gap.
Sivantos and Widex also have similar technologies.
Analysts at Bernstein said that increasing R&D spend may allow Sivantos and Widex to draw ahead of peers and that the new entity may be happy to experiment with new channels and approaches to market.
"With around a third of Demant and Sonova sales coming from owned retail, this would be bad news particularly for those players," Bernstein said in a note to clients.
Shares in Sonova fell 2.9 per cent, while GN Store Nord traded down 1.8 per cent at 0922 GMT.
Sydbank analyst Morten Imsgard said Sonova, William Demant and the newly formed company would each have an around 25 per cent market share, followed by GN Store with 16 percent and Starkey with 9 per cent.