Wenger offered him a new contract, and because he was a lifelong Athletico fan he turned it down and went there instead. Even Merida and his agent confirmed that there was a contract offered, and that he wanted to move to his "boyhood club". Wenger didn't table an improved offer because there's no point in fighting to convince a 20 year old who wants to leave, especially when Ramsey and Wilshere are in the picture.
With that Liverpool goal, I thought Merida was starting to really grow in confidence. At age 20, he could have become a great midfielder for us, but I guess it shows how easy it is to fall into the wilderness. The manager that signed him and wanted to play him was sacked, and the new guy didn't want him, and that ended up destroying his career.
EDIT: Found an old compilation
Merida, Rui Fonte, Arturo Lupoli, Carlos Vela, Bendtner... So many disappointing failures from that generation