The offer price of $25 per share in cash represents a premium of about 21 percent to Xoom's Wednesday closing price of $20.70.
Xoom shares surged on the announcement and were trading around the offer price in extended trading.
"Our aim is to bring the companies together to make it a true consumer champion in remittances," PayPal President Dan Schulman said in an interview with Reuters.
Xoom, which has 1.3 million customers and a presence in 37 countries, allows users to transfer money via desktop, mobile phones and tablets. The acquisition would allow Xoom to expand into new markets with less execution risk, Xoom CEO John Kunze said on Wednesday.
Xoom will operate as a separate service within PayPal after the completion of the deal.
PayPal faces increasing competition from rivals like Stripe and Square, which is popular with smaller businesses, and Apple Inc's Apple Pay. Online commerce foe Amazon Inc is also beginning to explore in-store payments.
The San Jose, California-based company said holders of about 18 percent of Xoom's outstanding shares, including all executive officers and directors of Xoom and certain entities affiliated with Sequoia Capital, have agreed to vote for the deal. It intends to fund the transaction with cash on its balance sheet.
PayPal said the deal, expected to close in the fourth quarter of 2015, will slightly hurt its adjusted earnings per share for 2016. The company is slated to separate from eBay this month and list as an independent company.
J.P. Morgan Securities LLC is financial adviser to PayPal, while Sidley Austin LLP is its legal adviser. Qatalyst Partners is financial adviser to Xoom and Goodwin Procter LLP is its legal adviser.
© Thomson Reuters 2015