Isn't that exactly how the Labour party was formed to begin with? As far as I've always been aware it used to be a race between the Liberal Democrats and the Conservatives, but then some more left leaning liberals went and set up the Labour party while splintering off from the Lib Dems.
I'm probably wrong on this though.
Not really, no. The Trade Union Congress used to endorse the Liberals in most cases, but found that the Liberals rarely responded to the Trade Unions and didn't value their endorsements, since prior to the existence of the Labour Party, you weren't going to do any better than the Liberals, so the Trade Union Congress decided to look into endorsing and sponsoring other parties to make the Liberals work for TUC endorsements. To do this, they invited a lot of smaller socialist parties from around the country and asked them to work together, since as it stood, they weren't a serious threat to the Liberals. The largest of these smaller socialist parties was the Independent Labour Party, founded and led by Keir Hardie.
Together, they founded the Labour Representation Committee, which wasn't a party, per se. It simply gave endorsements and trade union funding to the best socialist cause in any given constituency and attempted to negotiate stand-downs if, say, an Indepedent Labour Party candidate had to compete with a Social Democratic Federation candidate in the same constituency. You did have to sign up to a particular set of commitments in order to receive this endorsement, though. You might think of it as a slightly more centralised version of Open Britain in this election - a supposedly cross-partisan organisation that was really a cover to take out insufficiently pro-labour (small-l) Liberals/insufficiently pro-Remain Conservatives.
In 1900 the LRC endorsed 15 candidates and did pretty terribly, only electing 2. This was a horror-story election for the Liberals. They won 46.5% of the vote to the Conservatives 51.0%... but this translated into 383 Conservative seats to 182 Liberal seats (seats were a lot more marginal then, for very interesting reasons that would take too long to digress into). Small margins in the vote really, really mattered and the Liberals became terrified that the Labour Representation Committee would deny them government for the foreseeable future. So in 1903, they offered the Labour Representation Committee a pact, offering them a free run in some industrial seats in return for not challenging the Liberals elsewhere.
1906 turned into an absolute land-slide election in the end, and the Labour Representation Committee-endorsed candidates swept to 29 seats on the coat-tails of the Liberals. They realised they needed a proper party structure, with a more formalised Chairman, whip, party rules, nominating system, and so on, and so shortly after the 1906 election they formed the Labour Party (only by one vote! It was very nearly the Socialist Party!).
There was very little overlap between the Liberals and Labour. There were some candidates in the late 1800s who ran as Liberal (Labour) candidates, but that just meant they were Liberals who received a TUC endorsement and wanted to shout about it. In fact, it was the entire failure of the Liberals to embrace the TUC that led to the TUC taking its ball elsewhere. Of particular blame in that respect is Lord Roseberry. He was the last Prime Minister to be specifically chosen by the monarch against the wishes of the party, and Queen Victoria did so because he was a Liberal Imperialist and strongly anti-socialist, at a time when some of the newer Liberals were starting to have some socialist sympathies.
Ironically, it looks like Vic's decision backfired!
