The issue is that PS merges things down but doesn't take into account the blending on the upper layer...it takes whatever pixels are on that layer and put them into the lower layer and acquires the new layer's blending. So if both layers have blending then you'll need to merge both layers to a separate empty layer and then finally merge them together. Put an empty layer under the upper layer, merge it down, put an empty layer under the lower layer, then merge it down, then finally merge the upper and lower layers.