This works in theory. Once you start getting into complex projects, it quickly breaks down. Merge tools don't properly understand that, even though the closing tag (e.g. "};" in a project file or an XML node in a storyboard file) is the same, it doesn't mean that the contents are the same. You quickly end up with a corrupted file because it leaves off the closing tag on one of the two.
Give p4merge a try. We have a huge codebase, and I've found that p4merge, though not perfect, tends to do better than the default.
Another thing we've done to keep the insanity down is break our monolithic project into a few library projects to keep the project file merge damage to a minimum.