Volkswagen says it has indefinitely halted talks over its merger with Porsche, saying the sports car manufacturer is not prepared for a partnership. Porsche went into significant debt earlier this year acquiring a majority share in Volkswagen.

Volkswagen says that Porsche, which wants to align the two automakers together under one umbrella, lacked a sufficient strategy for the potential integration.

“We recognized at the end of the week that Porsche is lacking several fundamental conditions for the discussions,” a VW spokesman said on Sunday.

The automakers had planned to meet today to discuss the merger, but the meeting has been canceled. Porsche says that the talks will continue, but Volkswagen says it is holding off.

The Porsche-VW tie-up is a family affair; Porsche’s supervisory board is mostly made up of Porsche family members and VW Chairman Ferdinand Piech is a grandson of Porsche founder Ferdinand Porsche. Yet Piech says that Porsche, the automaker, must reduce its 9 billion euro debt (about $12.3 billion) before it seriously considers an integration with VW. Porsche incurred the debt when it scrambled to pick up a controlling share in VW late last year.

Porsche confirmed today that it is seeking an outside investor, with today's news coming after a recent announcement that talks between it and Volkswagen to form an integrated company had broken down. The company is sitting on more than €9 billion ($12 billion) debt, which has forced plans to push for a 75% stake in VW and gain access to any cash reserves to be abandoned, but Porsche is still confident that an investor can be found.

The move has the full of backing of the Porsche family, the company’s majority shareholders, but union bosses at VW are still wary of a takeover. While no takers have been revealed, the Financial Times reports that Porsche will most likely seek an investor from the Middle East. Any final decision, however, isn’t expected for several weeks.

Porsche originally racked up the debts while increasing its stake in VW to just over 50% last year. In terms of shareholder ownership, Porsche and VW are therefore already combined, though a closer integration was desired to erase its remaining debts.

Volkswagen's love/hate relationship with Porsche is once again firmly in the love department thanks to the resumption of merger negotiations.

As we reported a few days ago, merger talks broke down when VW declared Porsche lacked a legitimate plan for integrating the two companies. Apparently there was a change of heart and both companies issued identical press releases stating they "...will advance efforts toward this goal (the merger) in a constructive way and in mutual agreement with all the parties concerned."

Despite this minor victory, the merger still faces several hurdles including Porsche's massive 9 billion euro ($12.27 billion USD) debt and an angry Volkswagen labor union which wants detailed plans for the post-merger strategy.

Both companies are hoping to get everything wrapped up by early June, but in the meantime Porsche is attempting to refinance its debt and sooth anxious Volkswagen shareholders.

FRANKFURT — When Wolfgang Porsche learned that his family’s sports car company would need an emergency cash infusion from its giant rival Volkswagen, he “went absolutely white.”

“It was as though he’d heard someone died,” said one person briefed on the secret meeting between executives of the two companies.

The meeting, at the offices of the governor of Lower Saxony state, where Volkswagen is based, effectively ended the company’s audacious bid for Europe’s largest automaker. It also was the beginning of the end of Porsche’s cherished independence.

A day after the meeting, on March 23, fax machines around Germany spit out papers for Volkswagen’s board members to sign: an emergency loan of 700 million euros from Volkswagen, about $950 million at the time.

“This is becoming a reverse takeover on a financial level,” said Arndt Ellinghorst, head of automotive research at Credit Suisse in London. “Porsche has debt and VW has the luxury of cash.....”

Following a failed takeover of Volkswagen, Porsche has fired CEO Wendelin Wiedeking and CFO Holger Härter. Wiedeking orchestrated the failed takeover of VW, leaving Porsche with a debt of $12 billion and a cash shortfall somewhere in the neighborhood of $3.5 billion.

Rumors of Wiedeking’s dismissal have been circling the internet rumor mill for several days now, but Porsche made the announcement official on Thursday. Wiedeking took over as Porsche CEO in 1993, taking the company from the brink of bankruptcy to one of the most profitable marques in the world. However, Wiedeking’s failed acquisition of much larger VW has left Porsche, once again, in a dire financial situation.

Härter, Porsche’s CFO, has also been released by the German automaker, according to The New York Times. While Wiedeking setup the business takeover of VW, Härter handled all of the finances behind the deal.

The departures of Wiedeking and Härter will likely pave the way for an integration of the two automakers, making Porsche the 10th brand under the VW umbrella.

Wiedeking, already Germany’s highest paid executive at €77.4 million, will receive a €50 severance package from Porsche. However, Wiedeking has already set aside €25 million of that figure for charitable organizations

Following weeks of negotiations, Volkswagen has agreed to purchase a 42 percent stake in Porsche, totaling a $4.7 billion investment. The move will combine the two German automakers, likely under the revived Auto Union banner.

According to Automotive News, VW will complete its $4.7 billion investment in Porsche by the end of the year, with the two companies expected to be fully integrated by the end of 2011. Volkswagen’s current CEO, Martin Winterkorn, will act as the new head of Porsche and will likely oversee the combined company.

Porsche’s failed takeover of VW earlier this year set the stage for the merge. Porsche fought over the last several months to takeover VW – Europe’s largest automaker – but would up with a mountain of debt totaling $12 billion. After the failed takeover, Porsche fired CEO Wendelin Wiedeking.

VW will finance the merger with a preferred share offering early next year. Despite the takeover, the Porsche and Piech families will remain the largest stakeholders in the new company.

Porsche’s failed acquisition of Volkswagen – Europe’s largest automaker – raised more than a few eyebrows in the automotive industry, and the David vs. Goliath saga apparently grabbed the attention of local authorities. German prosecutors raided Porsche’s Stuttgart headquarters today on suspicion of possible security violations and market manipulation.

According to Bloomberg, German officials raided Porsche’s headquarters earlier on Thursday, seizing several financial documents. It is believed that preached several security laws, including leaking insider information.

“Based on evidence provided by Bafin (the German regulator), we have opened a preliminary investigation into suspected market manipulation and unauthorized leaks of insider information,” Claudia Krauth, a spokeswoman for the prosecutor’s office, told Bloomberg.

German officials are also investigating former Porsche CEO Wendelin Wiedeking and former CFO Holger Haerter.

Although Porsche has not been found guilty of any illegal activities, it seems that the German sports car maker has landed itself in some pretty hot water. Many questioned how such a small company could swallow one of the world’s largest automakers, and it looks as though officials may have uncovered the answer. Stay tuned as the events unfold.

In a bid to speed along integration with Porsche Automobil Holding SE, Volkswagen announced on Tuesday that it will purchase a 49.9 percent stake in the German sports car maker. The move will cost Volkswagen $5.8 billion.

VW was originally slated to take a 42 percent interest in Porsche, but upped that investment level to 49.9 percent due to better than expected progress on some VW-Porsche joint projects. That 42 percent stake was expected to cost VW $4.9 billion.

With the investment now in place, VW hopes to complete its merger with Porsche by the end of 2010. VW currently supplies parts for about a third of all Porsche’s vehicle offerings, according to Automotive News.

The news comes as a complete reversal for Porsche as the company was planning a 51 percent takeover of VW up until just a few months ago. Porsche failed to raise the necessary capital to complete the takeover, resulting in a 10 billion euro debt and the firing of the company’s CEO and CFO.