To turn that into a ips would mean someone else would have to have your special one game rom. So that would mean you would be better off sending as a rom, which would limit its distribution cause most rom hacking sites wont allow rom distribution.

I don't see the advantage of splitting Super Mario All-Stars into separate games. From a ROM hacking perspective, you're free to hack any or all of the games present there and still create a single IPS patch. I don't see how hacking the game would be made any easier. In fact, it would make distributing your hack much more difficult since as mentioned nobody would have your source ROM. The method you describe seems like you're just sticking the ROM in the IPS. That defeats the purpose.

To add to frantik's explanation, just because the data isn't in the original format doesn't mean it's not illegal. Could you transcribe the contents of a PDF file into a text document and redistribute that legally (assuming it is illegal to redistribute the PDF)? No, because the original content still exists in some form. Same concept here.

And as for separating the games, like NC said it just makes things harder. If I remember correctly, each of the games share a certain amount of data, so you'd have to fully trace down each game to the byte in order to know what to split up and what to copy. Then, you'd have to go through all the effort of reinserting the data. In the end, it would be even more work than just hacking the game normally.