You can also open up an edit session, and select which polygons you want to merge manually. This works as long as all of the polygons to merge are in the same layer.
Whether you do it with an edit session, or one of the tools (Merge, Union, etc.), you'll want to decide how to group your watersheds. I would look for a way to standardize the selection process for merging so you can defend your choices, make it easier to improve the selection process, and potentially give yourself a chance to automate the select-and-merge process if you need multiple iterations.
NO MATTER WHAT you join, you should be careful to make sure that the combined polygons are still hydrologically natural units. Most people probably wouldn't want merge two watersheds that span a major ridgeline with water flowing ino different rivers on either side of the ridge.
