The primary reason Mercedes were considering it was to help promote their brand to a younger audience, the thinking being than an association with Red Bull would help.
The F1 team personnel have always been against it. It was the Mercedes hierarchy who were considering it, but it seems they've been persuaded otherwise by Wolff and Lauda.
Lauda has been vocal in saying he'd supply the whole grid. This article doesn't say who the source is and isn't entirely believable.
Remember that teams are in negotiation over these things, the right PR, the right leak, the right pressure can result in more favourable terms for a team.
If Mercedes get stories published left right and centre that they are basically going to refuse because RBR might badmouth them... RBR in desperation to get the engines promise contractually not to do so. People need to read beyond the headlines and read into the political motivations for such leaks.
F1 is one of the most politically involved sports around and nothing is straight forward. I'm under the impression Lotus have a contract for Merc engines next year, at this stage the FIA need to approve a request to allow Merc to supply a 4th customer team. If Merc play the part of utterly happy about it, desperate for approval other teams will be less inclined to approve(if as rumoured the FIA also seeks team approval before rubber stamping permission). A Merc playing the part of scared of the competition and not entirely happy about the situation is one the other teams are more likely to be okay with than the Merc running around jumping for joy at the prospect.
Currently Merc are almost 200 points ahead of Ferrari, if RBR took 1/3 of their wins away sure RBR would be closer to Ferrari, but Merc would have less points and be closer to Ferrari also, ergo Ferrari would be closer to the top.
Effectively the worse the deal looks for Merc the more the rest of the teams and the FIA are likely to approve them supplying another team.
It's the same method behind Bernie, he goes around making up crazy ideas no one wants so everyone else starts agreeing to sensible things they were previously fighting over in case Bernie pushes through one of his mental ideas. Though Bernie's ideas are more to scare the fans into supporting ideas rather than the teams. Hence his carefully timed plans that fans rage against right before teams agree to other changes for future seasons.