Merge Modules: Merge modules are merged into your package at MSI compile time. They are intended to be merged into any MSI package that needs the components from the merge module. As such it is a distribution mechanism for shared components or runtimes or whatever you need that many packages consume.
Merged Content: The merge modules become part of the packages they are merged into and they are hence reference counted by MSI itself - not by some custom means - so that the components are only uninstalled when there are no other MSI packages depending on them. Components can also be set permanent, in which case they are never removed.
Updates: If you want to update the files from the merge module, you basically need to create a new version of the merge module.