You want the blocks to have a large amount of energy transfer. So to maximize this, the ratio is 1.
Can M be less than m?
It can, but you wont get maximum compression
Can you please elaborate? Is there any use of value of e in this case?
Ideally, you'd want to write the equations and check.
Write the equation for coeffecient of restitution, and also conserve momentum. Solve them and try to maximize the value of M/m.