There are a number of things one must keep in mind to enable merging:
1) the three units to merge must not be grouped with any other units, including each other. Select the primary unit to lead the merge and if there are 2 other units (on the same plot) that it can merge with, the option becomes available.
2) none of the units to merge may have moved this round
3) none of the units to merge may be loaded
4) none of the units to merge may be wounded
5) if given quality upgrades, all of the units must be of the same quality level
6) all three units must be of the same unit type, such as swordsmen, for example.
7) there are a number of unit types that cannot merge: Anything that modifies property values (Law Enforcement, Healers, Criminals) or is a visibility or invisibility specialist (Hunters, canines, felines etc...). Generally, merging and splitting are just for military and transport units.
That's usually the stuff that gets ya. There may be others.