Why does a matrix diagonalise in this case?

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Why does a matrix become diagonal when sandwiched between "change of matrices" whose columns are eigenvectors?
 
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Change of basis matrices change the basis to the eigen-basis.

In the eigen-basis (the basis formed by the complete set of eigen-vectors).
##M \hat{e}_k = \lambda_k {e}_k##
so ##M## must take the form of a diagonal matrix ##diag(\lambda_1,\lambda_2,\ldots,\lambda_n)##
If you cannot follow that then I suggest you simply do the math for a couple of concrete examples until it clicks.
 
change of basis matrices transform your matrix into one that acts on the columns of the change matrix. since those are eigenvectors, the new matrix is diagonal.