Volkswagen and Porsche have agreed details that will result in a merger by 2011.
VW will buy a 3.3 billion (2.8 billion) stake in Porsche by the end of this year.
The deal ends a bitter battle between the two companies, which brings to a close Porsche's attempts to raise the cash required to take ownership of VW.
Porsche has already built up considerable debts in its battle to secure a controlling stake in its compatriot.
Failure cost jobs
The attempted coup was not bloodless, with Porsche's chief executive, Wendelin Wiedeking, and financial director Holger Haerter losing their jobs.
VW chief executive Martin Winterkorn said the deal heralded 'a new era' for both companies and that Porsche is 'a real enrichment for VW's portfolio'.
Porsche will now join companies Audi, Seat and Skoda in the VW family.