It's pretty much what it says, it can't merge when the final grid would result in 2 blocks overlapping, this same rule applies to vanilla mergeblocks.

Try it with those to see, and my buildinfo mod has a feature to show where mergeblocks fail (it won't work for this mod's pads, I'm weird like that xD) https://psteamcommunity.yuanyoumao.com/sharedfiles/filedetails/?id=3226317831