There is no true answer as to why 'M (or 'M Block) exists. However, there are many theories. I shall list all the ones I know below:
1. 'M is just a programming oversight, possibly used to help the programmers access various things quickly in the early beta versions of the game. Most people think this is how Missingno came to be, but they just mixed up the theories. 'M resides in 2 HEX Values only; 00 and 50. The fact it is HEX 00 explains the reason why sometimes you encounter one 'M with Lvl 0 that has the minimum HP and stats any Pok�mon can have. HEX 00 is not really a proper part of the HEX Value list and was never meant to be used in R/B apart from beta testing. HEX 50 is the "End of Name" marker in your name variable. This is 80 in standard decimal, which would explain why some people get their 'Ms at Lvl 80 and also explains the reason why 'M comes up on the Cinnibar Island Strait.
2. 'M is a remnant of a Pok�mon character that was cut from the game. Were there originally going to be 152 Pok�mon? Who knows. The first one I've come across is the baby Kangaskahn. This would make sense as 'M evolves into a Kangaskahn. This one would be proven useless if my theory of why 'M evolves into Kangaskahn below was true, though. The second is Mew. Were they originally going to put it in the game before someone decided it was too sacred? Again, no one really knows. The third, and possibly the most interesting, is the "Pre-evolved Moltres". As everybody knows, Arcanine's so-called "legendary" status was possibly once just that. In the HEX Value list for all Pok�mon in R/B, Arcanine is directly next to Mew. Many people believe that it was once going to be the fire legendary along with Articuno and Zapdos. Moltres was just going to be a normal Pok�mon... with a pre-evolution. Maybe they designed and programmed this "pre-evolution" into the game before deciding that two birds and a dog didn't go, so they swapped Arcanine with Moltres, created Growlithe and deleted Moltres' pre-evolution.
Other info about 'M
When capturing 'M, you should always only have 5 Pok�mon with you and NEVER put it into PC storage. This can crash the system. Also, when you catch it, there will be an invisible Ditto battling you afterwards. I don't know why this is, but it's cute. When you look at 'M's stats, it will know two Water Guns and a Sky Attack. Its type is also "Bird". Many people think this was also a type that was cut from the game. 'M having two Water Guns in itself is kind of a paradox, since Pok�mon are forbidden to learn the same move twice by nature. The same rules apply to 'M as Missingno: it will mess up your graphics unless you know how to fix them, it will wreck your Hall of Fame and it will duplicate your sixth item. I will explain why it does this below.
Sixth Item Duplicate (or "Rare Candy" cheat)
Even just encountering Missingno or 'M can trigger the sixth item in your pack to be duplicated exactly 128 times. Why does this happen? Well, something in Missingno and 'M's data causes a trigger which takes the first bit of the "Copies of sixth item held" byte and automatically sets it to 1. No one knows why this happens, but it means that if you have 127 or less of your sixth item, this occurence will always happen. Most people think that if you put something like the Bicycle in your sixth slot, nothing will happen. THEY'RE WRONG! Just like the above, there is only one Bicycle so the trick will happen and it will get duplicated; the numbers just don't show up because they're not MEANT to. If you do this, try depositing your Bicycle in the PC and see.
Why does 'M evolve into a Kangaskahn?
Contrary to what I said above about the whole " Baby Kangaskahn" thing, I have actually come up with a possible reason why 'M does this. When 'M is captured, the game can probably sense some kind of disturbance in the programming, since 'M is the only HEX 00 in the whole game. To try and correct this mistake, the game takes the first opportunity of levelling up (ie. experience and Rare Candies) and reverts 'M's HEX Value to something sensible, forcing it to evolve into the Pok�mon with that particular HEX Value. In this case, it's Kangaskhan since it's at HEX 02 which is quite near the start (after Rhydon).
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