It drops in fine, as the engine mounts are the same. However the S52 is an OBDII engine and the M59 is an OBDI engine. You would need to do an OBDI conversion on the S52 in order for it to work.
Have you already found an S52 engine? They are fairly hard to did and usually quite expensive when you do. You will probably pay for for a complete S52 engine the your whole 318 is worth. You will also never get the money back in resale value as the vehicle will always be titled as a 318. If what you want is an M3 then you would be better off selling your car and buying an M3. It's cheaper in the long run.
I was browsing local classifieds a while ago and I came across an add that was titled "1996 M3". Upon reading the add it was not a genuine M3, but what the seller called an "amalgamated" M3. He had just bought an M3 engine and all the M trim pieces and was calling it an M3. Where I live this is considered fraud and is illegal.
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