UMich does stack merit with need based aids, however, merit aid may offset the loan and work study, and then the grant before it can reduce your EFC. Anyway, it is nice to reduce loan and work study as those are still your out of pocket cost otherwise.
Nevertheless, it is very competitive for merit scholarship at UMich. The 75th percentile for admission was 34/1530 last year and over 20% of admitted students have GPA 4.0 (or nothing below A-). You must be within the top few percent with perfect or near perfect scores and GPA to get one.