I have heard of two ways to make this work: 1) Bring Mercer to where you are, 2) go to where he is and follow him until he gets to where he is supposed to be.
As for (1), I did not try that. I read too many people having no luck with it.
As for (2), here is what you need to do: Once you enter the room where Mercer says something about getting the drop on him, your character is frozen. Sorta.
- Press the tilde (~) to open the console and type: epc
- Press ENTER. This will free you up to move freely.
- Type: player.moveto 00022651
- Press ENTER (the game will load to where Mercer is in the world)
- Follow Mercer until he he gets to the right room *OR* until he suddenly disappears from you
- *IF* he disappears from you while you are following him, type: player.moveto 00022651 and press ENTER. This should teleport you back to the room with him and the other NPCs and start the dialogue. Be sure to get to where he can see you so the auto-conversation can take place. Once it does, finish out the scene as you wish.
This is one of the most ridiculous glitches out there. How he goes from one cut scene to being totally removed from the quest area is beyond me. That has got to be some kind of scripting glitch. In any case, the fix above worked for me multiple times. I repeated the steps a couple times from older save games just to be sure it worked. NOTE: You may have to fight several things along the way. One "option" is to put yourself into "god" mode until you get back on task. I don't generally suggest going into "god" mode because it is too far down the cheating path, but since the is a glitch in the game, I see no problem using it to avoid getting killed while chasing doofus around the map.
Keywords: Mercer Frey, Blindsighted, "get the drop on me", glitch, bug, Thieves Guild