Sort the datasource on the Last Name then First Name columns then add
another column to your Excel datasource that you populate by using a formula
that grabs the first letter of the LastName field (=Left(cellref, 1).  Then
set up a director or catalog type mailmerge main document with the
mergefields in the first row of a one row table so that it produces

A    Adams, John    [other fields]
A    [additional names beginning with A
B    Brown, Mary
B    [additional names beginning with B
etc.

Then run the following macro of the document created by executing that
merge:

Dim source As Document, target As Document, scat As Range, tcat As Range
Dim data As Range, stab As Table, ttab As Table
Dim i As Long, j As Long, k As Long, n As Long
Set source = ActiveDocument
Set target = Documents.Add
Set stab = source.Tables(1)
k = stab.Columns.Count
Set ttab = target.Tables.Add(Range:=Selection.Range, numrows:=1,
numcolumns:=k - 1)
Set scat = stab.Cell(1, 1).Range
scat.End = scat.End - 1
ttab.Cell(1, 1).Range = scat
j = ttab.Rows.Count
For i = 1 To stab.Rows.Count
   Set tcat = ttab.Cell(j, 1).Range
   tcat.End = tcat.End - 1
   Set scat = stab.Cell(i, 1).Range
   scat.End = scat.End - 1
   If scat <> tcat Then
       ttab.Rows.Add
       j = ttab.Rows.Count
       ttab.Cell(j, 1).Range = scat
       ttab.Rows.Add
       For n = 2 To k
           Set data = stab.Cell(i, n).Range
           data.End = data.End - 1
           ttab.Cell(ttab.Rows.Count, n - 1).Range = data
       Next n
   Else
       ttab.Rows.Add
       For n = 2 To k
           Set data = stab.Cell(i, n).Range
           data.End = data.End - 1
           ttab.Cell(ttab.Rows.Count, n - 1).Range = data
       Next n
   End If
Next i

It will create a new documnet with the data arranged as you want it.