In a statement, Volkswagen said it would initially buy a stake in Porsche and "gradually" expand this over time.
"The integrated group should emerge from the progressive acquisition by Volkswagen of a participation in Porsche SA and the complete mergers of [parent firm] Porsche SE and Volkswagen AG," the statement said.
Porsche employs about 10,000 people while Volkswagen, whose brands include Audi, Seat, Skoda, Bentley, Bugatti and Lamborghini, employs about 370,000 workers worldwide.
The two companies already co-operate making sport-utility vehicles and Winterkorn said: "Volkswagen and Porsche have excellent expertise and can use their resources together even better."
Porsche announced Wiedeking's departure after an all-night meeting on its future that saw its board agree to seek a capital increase of at least $7bn as a way to improve its negotiating position with Volkswagen.
It said that this new sum would "create the foundation of building an integrated car manufacturing group with Porsche and Volkswagen".
The board also backed negotiations for the sale of a stake of Porsche to Qatar to bolster its balance sheet.
The carmaker would not say if the $7bn capital increase would come from the Gulf state.
Wiedeking was hailed for streamlining Porsche's operations and production but his David-and-Goliath effort, beginning in 2005, to take over the much larger Volkswagen ultimately felled him.
|Wiedeking was hailed for streamlining Porsche's operations and production [AFP]
His efforts in building Porsche's stake in Volkswagen loaded the company with huge debts just as the economy hit a downturn, leaving Volkswagen able to make its reverse bid.
In a recognition of the controversy his $70m payoff is likely to create in Germany, Wiedeking said he would set up a "charitable organisation" and provide it with half of his severance pay.
"Over and above this I will invest in projects, targeting at creating jobs in Germany," he said.
Christian Wulff, the governor of the German state of Lower Saxony, which holds approximately 21 per cent of Volkswagen, called on both companies to work together.
"We'll set off together to become the number one in the world," he said.