What bug?

MMMAAANNN's two line solution does l=248 in 1 millisecond but any higher causes maximum recursion error.

My point is that this solution is O(2^n) too, so your point is invalid.

That's because the random tests are woefully weak: only 20 chars max.

Why not try it yourself? ;-) Like this:

l = 50
p1 = 'a'*l+'b'
p2 = 'a'*l+'c'

print(is_merge(p1+p2, p1, p2))
print(is_merge(p2+p1, p1, p2))
# etc etc...

This test obliterates most existing solution easily. If not, increase l to 100 or something.

And your solution fails on this case:

is_merge('aaaabc','aab','aac') # should be True

Nope, it's still the same as the recursive ones. It'll still timeout badly for long strings.