Beyond Compare 2 does not support 3-way merging with an ancestor so the directions as written won't work. You can configure it to do a 2-way merge using the /savetarget= switch. Try this configuration instead:
[merge]
tool = bc2
[mergetool "bc2"]
cmd = 'C:\Program Files (x86)\Beyond Compare 2\BC2.exe' \
"$PWD/$LOCAL" \
"$PWD/$REMOTE" \
/savetarget="$PWD/$MERGED"
keepBackup = false
trustExitCode = false
Note that since it isn't able to use the ancestor file it can't detect conflicts. You'll have to go through the files and merge everything manually. Also, the interface is still the 2-way comparison; you need to pull all of the changes from one file into the other and then save it. The /savetarget
switch makes it so any time you save either file it will actually overwrite that path.