when copying a folder to an external hard drive whats the difference between merge and replace and which is better?

Merge adds from the source folder only those files not in the destination folder. Replace does what it says. It overwrites the destination with the source folder. They are different, not a matter of better.

If an external drive is properly formatted such that it can be read from or written to, then no formatting prompt will appear. If a drive is unreadable, then a prompt appears from which you can select Initialize, if you choose to format the drive.

A new drive may be formatted for Windows but is also readable on the Mac. However, it will need to be properly partitioned and formatted for use on the Mac. That would be done as follows:

Drive Preparation - El Capitan or Later

1. Open Disk Utility in the Utilities' folder.
2. After Disk Utility loads select the drive (out-dented entry with the mfgr.'s ID and size) from the side list. 
3. Click on the Erase button in the Disk Utility toolbar. A panel should drop down.
4. In the drop down panel set the partition scheme to GUID. Set the Format type to APFS (SSDs only) or Mac OS Extended (Journaled.)
5. Click on the Apply button and click on the Done button when it is activated.
6. Quit Disk Utility.