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A possible merger between Honda Motor and Nissan caught investors’ attention as Honda shares rose on Monday.

Why it matters

Japanese auto giants Honda and Nissan are working on a potential merger that would create the world’s third-largest automaker as the global industry struggles to adapt to the electric vehicle (EV) revolution.

The merger comes at a crucial time for Japanese automakers, which are struggling to keep pace with global electric vehicle leaders such as Tesla and BYD. Honda and Nissan plan to use their combined size to invest in electric vehicle production, shared components and advanced autonomous driving software.

What you should know

The companies announced Monday that they had signed a memorandum of understanding and that smaller Nissan alliance member Mitsubishi Motors Corp. had also agreed to take part in the discussions regarding the integration of their businesses.

According to Toshihiro Mibe, Honda’s president, the proposed deal aims to unite operations under a common holding company led by Honda while maintaining the distinct identities of each brand. If completed, the merger would enable the combined company to better compete with market leaders Toyota and Volkswagen.

Market reaction and industry outlook

News of the merger sent shares of both companies soaring, with Honda shares up 3.8 percent and Nissan shares up 1.6 percent in Tokyo, reflecting optimism about the potential reshaping of the global automotive landscape . Additionally, analysts believe the deal could trigger further consolidation in the auto industry as companies look to share costs and encourage innovation.

Based on the market capitalization of Honda, Nissan and Mitsubishi, the merger could be worth over $50 billion. Together they would produce around 8 million vehicles annually – still behind Toyota’s 11.5 million but ahead of most competitors.

What could the merger bring?

Analysts highlight potential benefits for both companies. Honda could gain access to Nissan’s expertise in large SUVs, EV batteries and hybrid technologies. Conversely, Nissan would benefit from Honda’s operational efficiency and reputation for quality.

However, Nissan’s troubled recent history could present challenges. The automaker has faced financial difficulties, management upheaval and reputational damage following the arrest of former CEO Carlos Ghosn in 2018.

What people say

said Honda President Toshihiro Mibe: “We have come to the realization that bolder change than collaboration in specific areas is required for both parties to be leaders in this mobility transition.”

While acknowledging the challenges ahead, he added that “there are issues that need to be examined and discussed. Frankly, the chances of this not being implemented are non-zero.”

said Nissan boss Makoto Uchida: “We expect to be able to provide even greater value to a broader customer base if this integration comes to fruition.”

Cabinet Secretary Yoshimasa Hayashi said he would not comment on details of automakers’ plans at a routine briefing on Monday, but said Japanese companies must remain competitive in the rapidly changing market.

“As the business environment surrounding the automotive industry is changing significantly and competitiveness in batteries and software is becoming increasingly important, we assume that the necessary measures will be taken to survive in international competition.” Hayashi said.

While speaking via video link to reporters in Tokyo on Monday, Ghosn described the planned merger as a “desperate move.”

What happens next

While the details of the merger are still unclear, Mibe said it aims to have a formal merger agreement in place by June and complete the deal and the holding company’s listing on the Tokyo Stock Exchange by August 2026.

This article contains reporting from The Associated Press.