Dollar Tree is buying rival discount retailer Family Dollar Stores in a cash-and-stock deal valued at about $8.5 billion. Activist investor Carl Icahn has a big stake in Family Dollar, as does billionaire Nelson Peltz.
Meanwhile, billionaire investor Carl Icahn said he is hopeful more potential buyers will surface for Family Dollar.
(Click here to read Carl Icahn's tweet)
"While we continue to believe there are a handful of potential buyers who could realize greater synergies through a combination with Family Dollar and are hopeful that one or more of them will surface as a result of today's announcement, we are extremely pleased with Dollar Tree's intention to acquire Family Dollar in a transaction that values the company at $74.50 per share," said Icahn in a press release. "This is a big win for all shareholders of Family Dollar and yet another validation of the activist investment philosophy in general."
Family Dollar stock soared in premarket trading Monday—even shooting up above the generous 23 percent premium to where shares closed on Friday. By midmorning, it was up more than 21 percent.
Under terms of the deal, stockholders of Family Dollar will receive $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each share they own. The companies put the value of the transaction at $74.50 per share.
Shares of Dollar Tree were 3 percent higher by midmorning.
The action in both stocks indicated the price tag for the deal might be too low, said Jan Kniffen, chief executive officer of J. Rogers Kniffen Worldwide—a retailing research and consulting firm. "There might be more money to be extracted here."
"I was actually surprised when I saw the announcement because when I read it I assumed it was Dollar General and Family Dollar, and it turned out to be Dollar Tree and Family Dollar," Kniffen also said in a "Squawk Box" interview: "We all assumed that [Dollar General-Family Dollar] was the very best match, because those two companies are more alike."
It's unlikely Dollar General will make a last minute bid for Family Dollar, though, especially as CEO Rick Dreiling plans to retire next year, Sterne Agee managing director Charles Grom told CNBC.
"I think they looked long and hard at Family Dollar late last year, and I think their view was to grow organically and buy back stock," Grom said on "Squawk on the Street."
Dollar Tree said the combined company would have more than 13,000 stores in 48 states and Canada, with sales of over $18 billion. It anticipates the transaction to result in an estimated $300 million of annual synergies by the end of the third year post-closing.
The announcement made no mention of store closings, but Telsey Advisory retail analyst Joe Feldman told CNBC he sees that as a probability. "You would think that they will close some stores. There's a pretty large overlap with the store bases. Not quite as much if Family Dollar and Dollar General had merged."
Feldman disagreed with Kniffen, saying a Dollar General-Family Dollar hookup wasn't as attractive. "It wasn't clear that one needed the other." Dollar General stock was down about 2 percent Monday morning.
All this action in the dollar store space would "raise some eyebrows" at Wal-Mart, which does about $300 billion in U.S. sales, the Telsey analyst added. "It does pick off that low-end customer ... [while] Wal-Mart is trying to go smaller but not with a dollar store concept. They are trying to go smaller grocery more."
Read MorePaulson:M&A activity to continue for foreseeable future
The boards of Dollar Tree and Family Dollar have unanimously approved the deal, which is expected to close by early next year. Peltz's Trian Partners, which owns 7.34 percent in Family Dollar, said it's "fully supportive" of this combination.
In a statement to CNBC, Trian also said:
"Since Trian's Chief Investment Officer and a Founding Partner, Ed Garden, joined the Family Dollar board in 2011, Trian has been working constructively with management and the Board to create value for shareholders. Trian strongly believe[s] that the combination with Dollar Tree represents the best path forward for Family Dollar and is a great outcome for all of the Company's shareholders. By joining with Dollar Tree, Family Dollar is becoming part of a stronger organization that will drive significant value for shareholders of both companies."
Family Dollar has recently been under pressure from Icahn to sell itself. Earlier this month at the CNBC-Institutional Investor Delivering Alpha conference, Icahn said the retailer has "good long-term potential but not with the management you have or the board that you have."
Read MoreIcahn: Heads should have rolled on Wall Street
Last month, Icahn disclosed a 9.4 percent in Family Dollar, and tweeted his intentions.
—By CNBC's Matthew J. Belvedere. CNBC's Drew Sandholm, as well as Reuters and the Associated Press contributed to this report.