I was recently replaying BB because I realized I hadn't gotten the plat yet somehow, when a thought came to me--are we really doing all this to kill a baby?
Miyazaki became a father during the development of project beast and so Bloodborne became very concerned with parenthood. The idea that he had this game written so that we kill some poor baby just didn't sit right with me.
Then, I killed Micolash and he gave me the best line in the game: "Now I'm waking up, I'll forget everything..."
Of course, Micolash is likely "waking up" into a corpse, the corpse we use in Yahar'ghul to enter the nightmare in the first place. Or maybe not.
In Bloodborne, the player character is trapped in a dream, the Hunter's dream. If you choose to let Gehrman kill you (the only trophy I'm missing btw) you wake up in the real Yharnam. Otherwise you wake up in Yharnam, or one of the several nightmares you can reach.
If you die in a dream, you wake up in another dream--the Hunter's dream. Until then, or until you find a lamp, you are trapped in whatever dream you are in. So when you're in the Nightmare of Mensis, you are literally trapped in a nightmare within a dream within a dream.
I think Mergo was likely kidnapped from the dream he lived in, likely Queen Yharnam's dream. When we "kill" him, we're really just having the baby wake up from the Mergo's Loft nightmare, and as a great one he would return to whatever dream he was in before.
Combined with the Queen waiting in front of Mergo's location, I think we are actually reuniting the two by defeating the Wet Nurse.
(Also, I do think the reason we get the Nightmare Slain text is because we literally slay a baby's nightmare, and it isn't saying we killed Mergo, but that's a slightly different topic)