Bibi Netanyahu and Avigdor Liberman go way back--in 1996 Liberman was the Director General of the Prime Minister's office when Netanyahu won a  close election against Shimon Peres.

No one seemed to see this union coming, which means that already this Israeli election has gotten interesting.  Ha'aretz has referred to the union as the "Biberman alliance" --one that they say is a war cabinet for a confrontation with Iran (although, I don't think that's a fair categorization- Liberman's  more recent statements suggested he believed sanctions were working and should be increased in order to foment protest in Iran).

The union would seem to make the possibility of a Likud -Labour centrist coalition not very likely at all. "It doesn’t even occur to me to join this party” in a post-election coalition, Shelley Yachimovich, Labour leader said, moments after Netanyahu and Liberman announced their merger, according to the Times of Israel .

And will Ehud Olmert decide to enter the race ? Apparently he won't decide until after the US elections. If Romney wins, Netanyahu is expected to have  a cake walk. If Obama wins, I think Olmert will try to enter the race.

Some analysts are writing that Netanyahu will make many in the world very uncomfortable with his new alliance. Larry Derfner, (a hard core left winger) writes:

"Netanyahu hurt himself. I don’t know whether the new party will win more Knesset seats in the January 22 election than Likud and Yisrael Beiteinu could have won separately, but Netanyahu has dirtied himself in the eyes of the world, including even a lot of his mainstream Jewish supporters in the United States. Avigdor Lieberman has a thoroughly deserved international reputation as an Arab-hating, war-loving neo-fascist (this last label having been pinned on him even by Martin Peretz, the stridently pro-Israel ex-publisher of The New Republic.)" http://972mag.com/the-lieberman-deal-a-wake-up-call-to-the-world-about-israel/58501/

Regarding Liberman, it should be remembered that he is still waiting for Attorney General Yehuda Weinstein's decision on whether or not he will be indicted on several cases--which could include charges of fraud, breach of trust, money laundering, fraudulently obtaining benefits and harassing witnesses. Weinstein was supposed to announce his decision in early September, but has  failed to do so. In the event Liberman were indicted and had to step down, Netanyahu could still presumably lead the "Biberman" faction without him. 

To read a very good analysis by Herb Keinon of why Netanyahu and Liberman have united their parties-(Likud and  Israel Beitenu) to run on one slate, click here

http://www.jpost.com/DiplomacyAndPolitics/Article.aspx?id=289334

Another thoughtful analysis is by David Horowitz, emphasizing that the union opens the door for Avigdor Lieberman to run to be the next Prime Minister after Netanyahu : http://www.timesofisrael.com/netanyahus-bombshell-marks-liberman-as-his-heir-apparent-for-now/