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I would be unhappy if the information wasn't disclosed, more for the dishonesty (or less-likely, oversight) than anything else. The course of action I would take depends on the price paid. Do they affect functionality? Probably, but somewhat insignificantly. :making up a number: ~1-2 hp max.
The closer you get to the engine block, the more critical it is to have a well-designed exhaust system because the exhaust gasses are hot and moving quickly. I'm not a ME, but I'd venture to say the bend design is more important than the straight sections of pipes based on what I know about fluids. So, the damage appears to be in a bad spot. However...
In a hydraulic system, it's undesirable to have a 90 degree bend before a pump - it creates turbulence which causes cavitation. As you get further away from the bend, the turbulence smooths out and the flow becomes laminar. Why do I say this? Because I believe whatever turbulence that damage creates within the bend will be smoothed out and non-existent by the time that cylinder's exhaust header combines with the others. The loss in performance will be isolated to that cylinder alone because the turbulence won't be introduced into the flow of the other cylinder's exhaust headers.
The largest horsepower gain comes from the removal of the catalytic converters. From what I've read, Euro headers alone give about a 10-15 whp gain. And while it's somewhat "ricer math," you can divide 12.5 hp by 6 and get ~2 hp per cylinder. Will that cylinder's header flow better with the damage but no cat? I think so. That's where I came up with the 1 hp figure. A real engineer would probably kill me for such a broad generalization and assumption, but I think it's accurate.
Maybe Gio can chime in, as he's designing a full exhaust system for the M.
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