(Reuters) - Canada's Mitel Networks Corp MNW.TO said on Friday it would buy U.S. voice and telephony gear maker Polycom Inc PLCM.O for about $1.96 billion in cash and stock, in a deal that had been championed by activist investor Elliott Management.

The merger will reduce Polycom’s tax bill since the combined company will be domiciled in Canada, making it the first so-called tax “inversion” deal since the U.S. Treasury Department issued new rules earlier this month to curb such transactions.

President Barack Obama’s proposed rules discourage tax “inversions”, which are tax-driven deals in which a U.S. company merges with a foreign business and adopts its tax domicile to reduce the combined company’s overall tax burden.

Upon closing, former shareholders of San Jose, California-based Polycom are expected to own close to 60 percent of the combined company, with Mitel shareholders owning the remainder. The company will have its headquarters in Ottawa and will operate under the Mitel name while retaining the Polycom brand.

Mitel executives, who will run the company, brushed off concerns the deal could be affected by the new inversion rules.

“This is strategic, first. This has nothing to do with an inversion at all...we will always pay taxes right,” said Mitel chief executive Rich McBee, adding that while Mitel has a smaller market capitalization than Polycom, it has 1,000 more employees.

Polycom stockholders will get $3.12 in cash and 1.31 Mitel shares for each of their shares, or $13.68 based on the closing price of a Mitel common share on April 13.

Shares of Polycom closed 2 percent lower on Friday, while Mitel’s U.S.-listed shares closed down 10 percent.

Wells Fargo analyst Jess Lubert said that while Polycom shareholders will be disappointed by the high stock component, the deal is the right move for Polycom.

“Polycom’s decision to be acquired by Mitel is a risk worth taking, as we think the challenges of remaining a standalone entity may be even greater for Polycom given the intensifying competitive backdrop,” Lubert said in a research note.

The deal, worth $13.44 per share as of Thursday, represents a premium of 9.5 percent to Polycom’s last close and is expected to be accretive to Mitel’s shareholders next year.

Hedge fund Elliott Management, which holds a 6.6 percent stake in Polycom and a 9.7 percent stake in Mitel, has been pushing the companies to merge since October, and voiced its support on Friday.

Mitel made the initial approach to buy Polycom, Reuters reported in March, citing sources familiar with the matter.

Mitel said it plans to finance the cash portion of the deal with cash on hand and proceeds from new financing. The company also said it has received about $1.1 billion of financing from Bank of America Merrill Lynch, its financial adviser. Polycom was advised by Morgan Stanley MS.N.