Nissan Motor shares saw a record surge Wednesday following a media report that the struggling Japanese automaker is looking to merge with Honda Motor, forming a bigger entity that can compete with larger rivals and invest more in the growing market for electric vehicles.

Nissan shares gained 23.7%, notching the firm’s best day since at least 1985, according to data from Factset. Factset does not have records for the company’s share price beyond 1985. Meanwhile Honda shares slipped 3%.

Honda and Nissan are considering operating under a holding company, and will soon sign a memorandum of understanding, according to a report in the Nikkei newspaper. They plan to eventually bring Mitsubishi Motors, in which Nissan is the top shareholder with a 24% stake, under the holding company, according to the report.

Speaking to CNBC, Vivek Vaidya, global client leader for mobility at research firm Frost & Sullivan, said the merger was triggered by the financial underperformance of Nissan.

Back in November, Nissan had posted downbeat results for its second quarter ended September, and slashed its full year revenue and operating outlook. The automaker also announced plans to slash 9,000 jobs and cut global production capacity by a fifth amid fierce competition in its major markets.

Joe McCabe, the president and CEO of AutoForecast Solutions, told CNBC Wednesday that Nissan needs a “revitalization” after its relationship with Renault went sideways.

“They [Nissan] really didn’t have a leadership position in any one of the segments they competed in,” he said.

In a statement, Nissan said media reports that it is “considering a business integration” with Honda are not based on an announcement from the company. Nissan said it is considering various possibilities for future collaboration with Honda and Mitsubishi Motors, but no decisions have been made. Shares of Mitsubishi Motors closed 19.7% higher.

Frost & Sullivan’s Vaidya said the merger, should it materialize, will allow all three automakers “to gain access to technology, to de-risk innovation and to create economics of scale.”

The combined entity, he pointed out, will have expertise in not only traditional petrol-powered internal combustion engine (ICE) vehicles, but also hybrids, battery electric and hydrogen vehicles.

Vaidya added that as automakers are currently investing in both ICE vehicles and battery powered EVs, a merger between Honda, Japan’s second largest auto, and Nissan, the number three, will mitigate innovation risks.

The combined Nissan-Honda-Mitsubishi enterprise would equate to more than 8 million vehicle sales annually, according to Nikkei. That would place the company among the world’s largest automakers, but still below fellow Japanese automaker Toyota Motor, at 11.2 million in 2023, as well as German automaker Volkswagen, which last year reported sales of 9.2 million vehicles.

The merger report follows the two Japanese automakers entering into a strategic partnership earlier this year on shared automotive components and software.

Such a tie-up would be the largest automotive industry merger since Fiat Chrysler joined with France-based PSA Groupe to form Stellantis in January 2021.

The global auto industry faces several challenges including the transition to EVs, a category dominated by the likes of Tesla and China’s BYD. Volkswagen, for instance, plans to close factories and cut thousands of jobs in Germany, while General Motors recently pulled the plug on Cruise, its self-driving robotaxi company.

For Honda and Nissan, there is also the threat of tariffs proposed by President-elect Donald Trump that may require a massive reorganization of global supply chains.

– Michael Wayland and Kevin Lim contributed to this report.