Over the past two years, the two companies have collaborated on the Ikea business and Emap's Big City Network, which they collectively pitched for and won last year.
As a result of the deal, the name Outfit will no longer be used.
Ben Bilboul, Outfit's founder and managing director, will join Karmarama's board, along with the planning director, Nick Barham.
Naresh Ramchandani, the co-founder of Karmarama, said: "We're delighted to conclude this deal. We now have a very strong line-up at every level in our business."
Before forming Outfit, Bilboul was a managing partner at St Luke's, while Barham previously worked as a planning director at Bartle Bogle Hegarty, before relocating to BBC Broadcast.
Bilboul said: "We've met and worked with a number of creative partners in the past two years, but Karmarama are by far the most interesting. They are an extremely talented team who share the same values and high standards, and we're proud of the work we've done alongside them.
"Joining Karmarama is a hugely exciting opportunity for us and a very compelling offering for clients."
Karmarama, which bills itself as a "communications design agency", was set up in 2000 by Dave Buonaguidi and Ramchandani, the former founding creative directors at St Luke's.
The agency's clients include Ikea, VH1, Emap, UKTV and Ann Summers.