The Merge Formatting toggle controls whether inserted content will be formatted like it is at the point of insertion or formatted according to the Style definitions per the document into which you are inserting the content, which we’ll refer to as the “target” document. Merge Formatting brings in the content and matches the formatting of the document at the point of insertion.  This means that the content you are bringing in will not match the Styles that are present in the target document and will only match the typeface/bold/underline/italics of the text where your cursor is positioned.

When Merge Formatting is turned off, the content will be inserted with formatting that matches the Styles of the target document.

• Merge-Formatting unchecked/off:  Content from the Library will inherit formatting from the Styles in the target document
• Merge-Formatting checked/on:  Content from the Library will inherit the formatting of the document at the point of insertion

More Information:

• See Styles in Word
• For Admins, see how to Format Library Content
• See how to Resize the Content Library Panel