BEIJING - Youku.com, China's largest online video company, said on Monday that it has inked a merger deal with its long-time rival Tudou Holdings Ltd, in an unexpected move which the company claimed would usher in a new era of China's online video industry.

An employee is seen through a glass wall as she walks past the logo of Youku.com above the reception desk at the company's headquarters in Beijing, in this Dec 9, 2010 file photo. [Photo/Agencies]

The two companies will merge through a 100 percent stock swap to forge a combined entity named Youku Tudou Inc.

Once the deal is completed, Youku shareholders and holders of American depositary shares (ADS) will own about 71.5 percent of the new entity, and Tudou will get the remaining 28.5 percent.

With a market value of around $2.85 billion, Youku is worth roughly six times more than the Nasdaq-listed Tudou.

Under the agreement terms, Tudou's shares will be canceled, while Youku's will continue to be traded on the New York Stock Exchange.

After the merger, the combined entity will hold more than a third of the country's online video advertising market, according to the Internet research firm Analysis International.

However, the move came as a surprise as the two companies had been engaged in a bitter rivalry involving allegations of copyright misuse and unfair competitive practices.

Last month, Youku filed a lawsuit against Tudou, saying it suffered losses after Tudou accused it of misusing copyrighted material.

Youku CEO Victor Koo seemed to consign those disputes to the past when he said, "We expect to see significant synergies across a number of areas including leveraging licensed content over a larger user base and realizing efficiencies in bandwidth management and other common expenses."

The merger is expected to be completed in the third quarter of 2012.