Ankush --
Can you tell us where these networks came from? The merge produces correct results for undirected networks ... and the results for directed networks are fine once you update the Network Merge core app. (This can be done with the App Manager in Cytoscape.)
The directed network case isn't so obvious, though, as it's hard to use Cytoscape to see when links are directed and when they're not. It's something we'll be working on in the future.
Could your networks contain directed links?? For this to happen, they would have had to have been created externally.