AOL's stock was up more than 18 percent after the announcement. Verizon's stock was down about 1 percent.
The transaction will be completed this summer and will take the form of a tender offer followed by a merger, after which AOL will become a wholly owned subsidiary of Verizon, the announcement said.
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"Verizon's acquisition further drives its LTE wireless video and OTT (over-the-top video) strategy," Verizon said in a statement.
Tim Armstrong, AOL's chairman and CEO, will remain at his position once the deal is finalized.
"Verizon is a leader in mobile and OTT connected platforms, and the combination of Verizon and AOL creates a unique and scaled mobile and OTT media platform for creators, consumers and advertisers," Armstrong said in the announcement.
He also said executing this deal was the next step for the company to continue growing.
"If you look at AOL over the last five years ... we turned the company around. We outperformed the S&P 500 for the last five years, and when you look at where we are today and where we're going, we've made AOL as big as it can possibly be in today's landscape," he said in a CNBC "Squawk Box" interview. "But if you look forward five years, you're going to be in a space where there are going to be massive, global-scale networks, and there's no better partner for us to go forward with than Verizon."
"It's really not about selling the company today. It's about setting up for the next five to 10 years, and we've spoken for years about this," he added.
Earlier this year, Armstrong dismissed rumors of a merger with either Verizon or tech giant Yahoo. "There's always speculation around us because we have taken a company that was not doing well and ended 2014 with two straight years of growth," he told CNBC on Jan. 7. "We have a lot of partners coming in to talk to us, but AOL has a unique vision, a unique strategy and we've stayed on strategy."
On Friday, AOL reported first-quarter earnings of 34 cents per share, 2 cents above estimates. Verizon also topped analysts' expectations after reporting first-quarter profits of $1.02 per share on April 21.
—CNBC's Tom DiChristopher contributed to this report.
This story originally appeared on CNBC