what does ... Your contacts will be merged with icloud mean?

I don't see that quote in the artyicakle you mention.

You see this prompt when you are enabling the sync on Contacts on a device in the iCloud settings. It means you are merging the contacts that are currently stored on the phone with the contacts that are stored on the iCloud.

So, if your phone has 10 contacts and the cloud has 20, you'll end up with 30 contacts on BOTH the phone and the cloud. Assuming no duplicates of course.