Aberdeen Asset Management is to buy Lloyds' fund management arm Scottish Widows for about £660m, creating Europe's biggest listed stand-alone fund manager.
Aberdeen will pay with shares worth £560m, or 9.9% of the company, and €100m in cash over five years depending on how well it manages various Lloyds assets.
Lloyds has agreed not to sell any of its stake for a year.
The deal raises Aberdeen's assets under management by more than two thirds to £336 billion.
It knocks Schroders into second place and offers it diversification into fixed income and property, where Scottish Widows is stronger.
Aberdeen chief executive Martin Gilbert, who stressed in April that a bid for Scottish Widows was highly unlikely, said that adding its Solutions business, offering wealth management products to Lloyds' customers, had clinched the deal.
"Our aim is to work with Lloyds to increase their market share in wealth management... It's the close relationship with Lloyds customers that really attracted us to do this deal," he said.
For Lloyds, the deal lifts its Core Tier 1 capital by 11 basis points from the 9.9% reached in the third quarter to a 10%target set by Britain's financial watchdog.
Lloyds, which is 33% state owned, is selling off non-core assets to strengthen its balance sheet and focus on lending to British households and businesses.
It needs to plug an £8.6 billion shortfall identified by Britain's financial regulator in June to persuade the regulator to let it start paying dividends again next year.
"We are confident that this transaction will deliver considerable additional value to our expanded client base and this will therefore benefit our shareholders. I am delighted to welcome Lloyds as a major shareholder," Gilbert said.
Led by Gilbert, Aberdeen has seen a big rise in assets since the financial crisis, buoyed by demand for its global emerging market equities funds and a flurry of acquisitions.
Gilbert said there would be some job losses where duplication existed. He declined to say how many would go.
Aberdeen released full-year earnings today slightly ahead of market forecasts. Net revenue jumped 24% in the year to September 30 to £1.08 billion.
Underlying pre-tax profits came in 39% higher, and Aberdeen said it would pay a full year dividend of 16 pence per share, up from 11.5 pence last year.
