Office applications are expected to run interactively, so there are a number of problems automating Office from IIS or from other non-interactive environments. See this kb article for details and workarounds.
Considerations for server-side Automation of Office
http://support.microsoft.com/?kbid=257757Mail merge can also be done more generically as HTML or RTF using simple string manipulation or with XSL transformations.
http://msdn.microsoft.com/en-us/library/aa537151(office.11).aspx