Shares of the Japanese automaker Honda were on track for their best day in 16 years after the company said Monday it would buy back up to 1.1 trillion yen ($7 billion) of its shares as part of merger negotiations Nissan.

Nissan and Honda said they had begun formal merger negotiations that could catapult them into the world’s third-largest automaker by sales.

Honda also said it would buy back 24% of issued shares by December 23 next year. Its shares were recently up 15.51% and would have their best day since October 2008 if the gains continue. Nissan shares fell over 1%.

The Honda-Nissan deal will focus on sharing knowledge and resources, achieving economies of scale and creating synergies, said Honda CEO Toshihiro Mibe. A holding company is established as the parent company for Honda and Nissan and is listed on the Tokyo Stock Exchange.

“These two companies operate in the same market and have a very similar brand image and very similar products,” Hakan Dogu, chairman of Alagan Mobility Solutions, told CNBC on Tuesday.

“The new management faces a major challenge to differentiate the product range and expand the business,” he added.

The talks are scheduled to conclude in June 2025.

Nissan’s strategic partner Mitsubishi has been given the opportunity to join the new group and is expected to make a decision by the end of January 2025.

Honda reported operating profit of 1.382 trillion yen for the full year ended March 2024, while Nissan posted 568.7 billion yen. The automakers would have a combined value of nearly $54 billion, with Honda’s market cap contributing the larger share of $43 billion.

Analysts believe the possible merger is due to Nissan’s financial difficulties and the restructuring of its long-standing partnership with France’s Renault.

In its most recent quarterly report, Nissan announced plans to cut 9,000 jobs and reduce its global production capacity by 20%.

—CNBC’s Jenni Reid contributed to this report.