Thanks Luca, that really helps.
I have engaged VMWare support - I'm scratching my head on this one. I can see the merge happening and review ESXTOP stats - only getting 10MB/s read/write from the host. Yet, if I run the VMWare IO analyzer appliance simultaneously (same host, same datastore, no other VM's) I can get 300MB/s + for 512k random read/writes). Doesnt appear that host,network or storage are running out of headroom