By Elsa Ohlen and Al Root
In the auto industry of the future, bigger just might be better.
Japanese auto makers Honda and Nissan said they plan to merge as traditional car makers try to cope with falling sales, slumping share prices, and increased competition from electric-vehicle makers.
Honda and Nissan signed a memorandum of understanding to explore synergies and integrate their businesses through establishing a joint holding company, they said in a joint statement Monday. Reports of merger talks surfaced last week.
The deal is expected to close in August 2026. It would create the world's third-largest car maker by annual sales, after Toyota and Volkswagen.
While the pair envision creating a company with almost $200 billion in annual sales and $20 billion in operating profit, they are far from achieving that.
Nissan is expected to generate about $1.3 billion in 2025 operating profit, with no free cash flow, according to FactSet. Honda is expected to generate about $10 billion in operating profit and about $2 billion in free cash flow this coming year.
Advantages of scale, more efficient research and development, operational improvements, and lower overhead are among the factors Honda and Nissan see as improving their performance over time.
"At this time of change in the automobile industry, which is said to occur once every 100 years, [...] we will be able to become a leading company in creating new value in mobility through business integration," said Honda CEO Toshihiro Mibe.
A hundred years ago, there was roughly one car for every 10 Americans, and cars were powered by gasoline. Now there is a car for every one or two Americans, and auto makers have to design and produce gasoline-powered, hybrid, and all-electric models.
If the deal works, it will put pressure on other midsize companies to, at minimum, think about doing something similar.
Operating on a bigger scale will help, but success isn't assured. Large auto mergers have a mixed history. The 1998 combination of Chrysler and what is now Mercedes-Benz didn't work -- at all. Chrysler went bankrupt in 2009 after Daimler sold a large stake to private equity years earlier.
Stellantis is the combination of several companies, including Peugeot and Chrysler. It has had some success, but 2024 has been difficult.
Investors like the idea, though. Honda's U.S.-listed American depositary receipts were up 13% in early trading at $27.05, while the S&P 500 was up 0.2%. The Dow Jones Industrial Average was down about 0.2%.
Nissan's U.S.-listed ADRs were down 1.3%, but the stock had already taken off in response to reports of a potential deal. Early trading leaves them up about 23% over the past week.
The companies had said in March that they had initiated a "feasibility study or strategic partnership."
The car makers plan to reach a definite agreement by this June. They then intend to create a new Tokyo-listed company in August 2026, of which both Honda and Nissan would be subsidiaries.
Write to Elsa Ohlen at elsa.ohlen@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 23, 2024 11:06 ET (16:06 GMT)
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