WPP will increase its stake in STW from 23.6 per cent to 61.5 per cent under the plan, with the newly merged group set to change its name to align it with WPP. It will become WPP's primary vehicle in Australia and New Zealand.
WPP has been an investor in STW since 1998, and the two companies have worked together on a number of ventures, including Ogilvy PR Australia.
WPP is to buy shares in STW at A$0.915 (US$0.66, £0.44) each, a 30 per cent premium to the price on 10 December.
In a statement this morning, WPP said the newly merged group would generate earnings before interest and tax of A$142m ($102.4m, £67.6m).
STW was founded in 1985, and listed on the Australian Securities Exchange in 1994.
WPP said: "The merger continues WPP's strategy of investing in important geographic markets and advancing ‘horizontality' to ensure our people work together for the benefit of clients."
The merger requires shareholder and regulatory approval.
Speaking to the Sydney Morning Herald, STW CEO Mike Connaghan said WPP approached the company earlier this year about a merger.
He told the newspaper: "Bringing the two together, to me, always made a lot of sense, it was just making sure we could get a sensible deal done.
"WPP was very keen to have its businesses involved in the transaction so it could get to a place where it has local management of all the assets of WPP and STW and that's my new job with the new company."