The integrated group will unite 10 brands under one roof
Europe's biggest carmaker, Volkswagen (VW), plans to buy German sports car firm Porsche in stages while retaining the latter's independence.
VW says its board will hold talks with Porsche "in order to reach a final concept fulfilling this goal".
Both sides had earlier said they wanted to form an integrated automotive group.
The latest move comes after Porsche's chief executive Wendelin Wiedeking and financial director Holger Haerter had resigned "with immediate effect".
Mr Wiedeking had failed in his long-running attempt to take over VW, despite Porsche building a 51% holding in the company.
Porsche had hoped to build up a 75% stake, but the financial crisis and the slump in the global automotive sector put paid to its efforts, which in the end saddled the sports car maker with huge debts.
The two companies aim to complete the merger by the middle of 2011, according to Christian Wulff, governor of Lower Saxony, the German state that owns a large stake in VW.
"I'm optimistic that we can lay out the details of our agreement in principle during a supervisory board meeting on 13 August," he said.
VW says that the new company will be achieved by the "gradual involvement of Volkswagen in Porsche AG" - Porsche's carmaking unit.
The integrated group would come under the leadership of VW.
Martin Winterkorn, chairman of the Volkswagen management board, said the move "makes two strong companies even stronger".
"Volkswagen and Porsche have excellent know-how at their disposal and can use their resources even more efficiently by combining them," he added.
He said the merger would create additional growth opportunities, as well as safeguarding and creating jobs.
"At the same time, we can call on our considerable experience in the integration of proud and successful brands rich in tradition.
"Like Audi today, Porsche can also continue its independent development under the aegis of Volkswagen and preserve its own identity," he added.
Porsche will effectively become the 10th brand under the VW umbrella.
Mr Winterkorn also announced that the Gulf state of Qatar would buy a 17% stake in VW.
Earlier on Thursday, Porsche said it would increase its capital by at least 5bn euros ($7.10bn; £4.3bn).
It said that this new sum would "create the foundation of building an integrated car manufacturing group with Porsche and Volkswagen".