Whoever told you that ILMerge was a solution obviously doesn't know anything about CF development or CAB files. It won't do you any good, so don't waste time looking into it.
Microsoft published an MSDN article that covers multi-CAB installs, which would be a very good first start. THen look at this blog entry about how to modify it.
As for avoiding confirmations, wcelaod.exe (the app that unpacks the CAB on the device) has command line options to prevent them.
EDIT
The sample source code for multicabinstall ships with the WinMo SDKs. FOr example, if you installed the WInMo 6.0 SDK in its default location, the source will be at C:\Program Files (x86)\Windows Mobile 6 SDK\Samples\Common\CPP\Win32\multicabinstall