Published: Thursday, 23 Jul 2009 | 11:26 AM ET

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Porsche conceded defeat in a months-long power struggle with Volkswagen on Thursday by axing its embattled CEO, paving the way for VW to merge with the maker of the 911 sportscar.

As a way to improve its negotiating position with Volkswagen, Porsche said it would raise at least 5 billion euros ($7.1 billion) in equity as the two prepared to create an "integrated automotive group." Meanwhile Volkswagen said in a statement it would buy a stake in Porsche AG, the company's financially healthy sports car business, and "gradually" expand this over time.

The two companies aim to then complete the merger by mid-2011, said Christian Wulff, premier of Lower Saxony, the German state that is Volkswagen's second largest shareholder.

"I'm optimistic that we can lay out the details of our agreement in principle during a supervisory board meeting on August 13," he added.

In addition Wulff said the Gulf state of Qatar is set to buy a financial derivatives package that controls 17 percent of Volkswagen shares, in a further move to ease Porsche's financial woes, and could expand its stake by acquiring non-voting preferred shares.

Porsche amassed over 10 billion euros in debt during a botched attempt to build a 75 percent stake in VW.

Weighed down by the debt, Porsche was forced to abandon further stakebuilding earlier this year and negotiate a merger instead.

But disagreements between the two companies about how to structure a deal held up negotiations.

Porsche's veteran chief executive, Wendelin Wiedeking, opposed a sale of Porsche to VW, clashing with Ferdinand Piech, the 72-year-old chairman of VW and grandson of Porsche's founder, Ferdinand Porsche.

Early on Thursday Porsche said Wiedeking, CEO for the past 16 years and Germany's best-paid executive, would leave the group immediately, along with finance chief Holger Haerter.

Speaking to workers assembled at Porsche's factory in Zuffenhausen, Germany, Wiedeking said he had taken the decision to step down a week ago, as it was time to "draw a line" behind Porsche's woes and move forward.

Chairman Wolfgang Porsche said at the meeting Porsche aims to "secure an independent future for Porsche as part of a globally leading manufacturer." Fighting back tears, he added that the legend of Porsche "will not go under." MERGER ON EQUAL FOOTING Michael Macht, who succeeds Wiedeking as CEO, said Porsche now needed to strike a deal with VW "on an equal footing." VW's CEO Martin Winterkorn gave assurances that Porsche would remain an independent brand within the Volkswagen group just like Audi.

"What is good news is that decisions have at least been prepared. However, still a huge amount of questions (are) open," said MM Warburg analyst Marc-Rene Tonn.

It remained unclear whether Qatar could take a stake in Porsche voting shares, in Volkswagen, or in both.

The Porsche and Piech families, which trace their origins back to VW Beetle creator Ferdinand Porsche, did not say if they would participate in the capital increase, but analysts believe the families could bring in the assets of their Salzburg-based Porsche Holding instead of cash.

An analyst who asked not to be named agreed: "I cannot think of another asset the families have." Porsche Holding is Europe's largest auto dealership group, with sales of 13.7 billion euros last year.

Porsche shares were up 0.3 percent at 51.75 euros, while Volkswagen's were up 1.2 percent at 255 euros, while the DJ Stoxx European autos index was up 2 percent.

AP

Wiedeking, credited with turning Porsche round to become one of the world's most profitable carmakers during his 16 years at the helm, will be succeeded by Porsche's production head Michael Macht, the board said in a statement early on Thursday.

The duo's hasty exit will be sweetened by severance deals of 50 million euros and 12.5 million euros.

Wiedeking, who had been criticised by German media for his fat pay check, said in a statement his after-tax payoff would be used for charity.

Following the credit crunch Porsche was forced to abandon attempts to win control over 75 percent of VW, leaving it with a stake of nearly 51 percent and opening the door to VW's Piech, himself a part-owner of Porsche, to turn the tables on Porsche.

The audacious attempt to take over VW was one of Wiedeking's favourite examples of the small car maker punching above its weight.

"Because nobody had this on their radar, it struck like a thunderbolt," Wiedeking once said.

In the event of a sale, Porsche would become the 10th brand in Volkswagen's sweeping automotive empire.

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