External stacks have priority; if there is more than one stack of the same type of troops outside, and there are no troops of that type inside, then these external stacks will not be merged. It seems that priority also applies when determining "excess" stacks. That is, if the total number of stacks inside + outside is greater than 7 (taking into account the merging of internal stacks and the non-merging of external stacks), then all external stacks will be in the battle, and internal stacks will only be included if there are free slots.