Uhmmmm First, make sure you have the lastest version... No wait... I'm going to attach the lastest version here in this post, just to make sure..
Ok.. Here's how it works... The database to merge into is the one you're using to run your currently vbulletin installation. You don't need to type the user / password for it, because the script have access to the database, as long as vbulletin is running fine.
Ok now, what's the host/user and password that you should fill at the start of the merge? It's the information for the SECOND database, the one you want to merge with your current vbulletin installation.
If this database is in the same server, you should fill similar values like the ones you have on your config.php. But you have the possibility to merge a database located on another server, by filling the correct host/user/pass and db name, and it should work.
Just send me a PM if you still have problems with the merger.
Here's the lastest version!
Link removed.