Newell's shares rose 1.8 percent to $51.25 in morning trading on Wednesday, while Stanley Black & Decker gained 1.7 percent to $119.74.
Newell, which owns more than 160 brands including Sharpie markers and Rubbermaid food containers, said last week it would divest about 10 percent of its business portfolio to streamline operations following its acquisition of Jarden Corp earlier this year.
Hoboken, New Jersey-based Newell's tool business had sales of about $760 million in the past 12 months, the companies said on Wednesday.
The deal will bolster Stanley Black & Deckers' tools and storage business, its biggest. The business includes corded and cordless electric power tools sold under the Black+Decker brand.
This would be Connecticut-based Stanley Black & Decker's biggest deal since it was created through the $4 billion all-stock merger of Stanley Works and Black & Decker Corp in 2010.
Stanley Black & Decker said it expected the deal to result in savings of $80 million-$90 million by the third year after close.
"Although the purchase price is dilutive prior to synergies, Stanley has a solid history of meeting or exceeding synergy targets," Wunderlich Securities analyst Liam Burke wrote in a note.
The companies expect the deal to close in the first half of 2017.
The deal would add about 15 cents per share to Stanley Black & Decker's earnings in the first year after close, and 50 cents per share by the third year, excluding about $125 million-$140 million of restructuring and other deal-related costs, the company said.
Stanley Black & Decker said it expects to finance the deal with a combination of cash and debt.
Newell, which will use the proceeds to reduce debt, said total 2015 net sales of the remaining businesses held for sale is about $700 million.
JPMorgan is financial adviser to Newell on the deal.
Reporting by Ankit Ajmera in Bengaluru; Editing by Sriraj Kalluvila