CHICAGO (AP) -- Tool makers Stanley Works and Black & Decker Corp. are betting that together they can wring out more profit and better position themselves for a housing market recovery than they could apart.

Battered by the housing slump and economic recession, two of the industry's most iconic brands are now merging. Stanley Works on Monday agreed to pay $3.46 billion for rival Black & Decker in an all-stock deal that will create the nation's largest tool maker.

The deal will cut costs by $350 million within three years, likely in part through job cuts, and grow earnings per share by $1 within three years, the companies said. Executives said most of the savings will come from reducing corporate overhead and consolidating business units and manufacturing, distribution and purchasing.

There is little overlap in the companies' products, said James C. Lucas, managing director of Janney Montgomery Scott LLC. Stanley is a leader in consumer and industrial hand tools and security, while Black & Decker holds a top position in power tools.

Stanley's brands include its Stanley tools line and FatMax, Bostitch and Mac Tools, which are used on cars. In addition to its namesake line, Black & Decker owns DeWalt, Porter-Cable, Kwikset and Baldwin brands, popular with consumers and professionals.

Stanley Chairman John F. Lundgren will be president and CEO of the new company. Black & Decker Chairman, President and CEO Nolan D. Archibald will serve as executive chairman for three years.

Archibald told analysts Tuesday that the deal has nothing to do with the recession.

"Both companies were weathering this downturn extremely well," he said. "Both companies had a very bright future on a stand-alone basis."

The deal began six months ago when Lundgren invited Archibald to lunch to discuss a potential merger, Black & Decker's CEO said. The executives met again in June, he said.

It was not the first time the two companies considered a deal. "This is a romance that started approximately 28 years ago," Archibald said.

Three times over the years, Stanley and Black & Decker executives discussed a combination because of the companies' "unique and complementary fit," he said.

"Each time for various reasons it didn't go anywhere," Archibald said. "The more John and I talked we just felt there was such a significant shareholder creation opportunity here that we ought to pursue this and our teams got together."

The deal comes after both companies have slashed jobs and cut other costs as the housing slump and global economic downturn reduced demand in the professional builder, industrial and do-it-yourself markets. Black & Decker last month said it expects demand for its industrial and consumer-power tools to continue to stabilize, but does not expect a near-term rebound.

James M. Loree, executive vice president and chief operating officer at Stanley, told investor analysts on a conference call Tuesday that the two companies have low costs compared with competitors, and the deal will cement that.

Black & Decker, based in Towson, Md., has 22,100 workers. Stanley Works, based in New Britain, Conn., has 18,200 workers. The new Stanley Black & Decker will retain headquarters in Connecticut, while its power tool division will remain headquartered in Maryland.

Lucas said it is too soon to speculate about how the deal will affect jobs, but the companies have different processes and therefore different plants.

Black & Decker shareholders will receive stock valued at $57.57 for each share held, representing a 22 percent premium to Black & Decker shares' closing price. Based on the company's 60.2 million shares outstanding July 24, the deal is worth $3.46 billion.

Stanley shareholders will own about 50.5 percent of the combined company, while Black & Decker shareholders will hold a 49.5 percent stake. The nine members of Stanley Works' board will remain and be joined by six new members from Black & Decker's current board.

Each company's board of directors has signed off on the deal, but it still needs regulatory and shareholder approval. It's expected to close in the first half of 2010.

Morningstar analyst Anthony Dayrit said space remains for smaller tool makers that make up most of the industry.

"There's a lot of smaller players who make cheaper tools," he said. "I think these guys will still be competitive because you have consumers that won't be willing to pay up for the quality of a Black & Decker tool."

Deutsche Bank and Goldman, Sachs & Co. acted as Stanley's financial advisers and Cravath, Swaine & Moore LLP acted as Stanley's legal counsel. Black & Decker's financial adviser was J.P. Morgan Securities Inc. and its legal advisers were Hogan & Hartson LLP and Miles & Stockbridge P.C.

Black & Decker shares climbed $10.70, or 22.6 percent, to $58.04 Tuesday morning. Stanley Works shares rose $1.86, or 4.1 percent, to $47.01.

Associated Press Writer Kasey Jones contributed reporting from Baltimore, Md. and Associated Press Business Writer Stephen Singer contributed reporting from Hartford, Conn.