I see that right-wing rag the New Statesman is flying the kite for Lib Dem / Labour merger. The magazine's columnists alternate between talking about that and Lib Dem / Tory merger as a distraction method to try and prevent conversation opening up about reunifying the historic Labour-Tory schism.
From Labour's point of view perhaps combining with the Liberals makes sense. Labour already have two puppet parties at their disposal, to variously neutralise anti-Labour votes and scare recalcitrant Labour voters to the polls. That's probably as many outlier parties as any election winning strategy needs.
What Labour need is a grouping that produces policies more progressive than Labour's own, to offer the positive social change many of Labour's supporters wish it represented. It turned out Labour's plans to introduce and then extend the bedroom tax, put ATOS in charge of disability benefits, charge citizens for mistakes the state made on their records, slash benefits for young people and so forth reminded voters so much of the Tories that they went and voted blue instead.
The Libs have kept coming up with proposals that Labour felt it had to leave untouched for a while before co-opting: the NHS, the welfare state, tax-and-spend economics, the mansion tax, opposition to apartheid, LGBT rights and so forth. Left to their own devices Labour spent tens of millions of pounds on policy development between 2010 and 2015 and still wound up borrowing Liberal proposals at the last minute. Moving that policy development unit in house looks to be a lot more efficient.
From the Lib Dem perspective though, never mind the gaping philosophical divide: the Liberals already did merging with a party to their right thing in the 80s, and it took ages to recover. Whyever would they do it again?