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QUEST MEANS BUSINESS

Intel/McAfee Merger; Fears of Double-Dip Recession; Australia Gets Ready to Vote

Aired August 19, 2010 - 14:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


RICHARD QUEST, HOST, QUEST MEANS BUSINESS: OK, batten down the electronic hatches, Intel is buying cyber security firm McAfee.

Campaign rows, internal coupes, party intrigue, but it is the economy that counts. Australia gets ready to vote this weekend.

And beware the double dip, in tonight's Q&A will the economy take a turn for the worst?

I'm Richard Quest. An hour with you, because I mean business.

Good evening.

The world's largest chip maker is making a massive investment in security. It is exactly sort of deal, the sort of M&A activity, niche perhaps, but the sort of deal the market is taking notice of.

Intel is paying $7.7 billion for McAfee, one of the world's leading makers of protective software for computers. Now, $7.7 billion, Intel says they are demanding more-well you and I are demanding more from computers than speed and connectivity. And as more of us put details of our lives online, we want to also be safe. Anyone who has suffered from a computer virus, as indeed my own computer had only a couple of weeks ago, knows the seriousness of all of this.

Maggie Lake is in New York and joins me. An interesting deal; it is part of this little-I would say, as I say-these niche M&A activities where value is being spotted between companies.

MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: And this deal came as a surprise. And that is hard to do these days on Wall Street. But the thinking was that a computer maker like HP or IBM would be a more natural buyer of some of these security companies. Because people were expecting some activity in this area, but not from Intel, the chipmaker, coming out as a dark horse here. And not only that they paid a 60 percent premium. So you can imagine McAfee shareholders pretty happy about that.

So, why is Intel doing that? Partially, of course, for diversification and the feeling that as more of our lives are not only online but moving to mobility, to devices that are sort off of our desktops in our own house, that the need for security is going to be greater and greater.

(BEGIN VIDEO CLIP)

RENEE JAMES, SENIOR V.P., INTEL: As the world of connected computing continues to grow, we are adding security as one of the major focus areas for Intel, along with power and performance. We are going to add a new P, protection.

DAVE DEWALT, CEO, MCAFEE: Connected devices are exploding as the movement of the new Internet, from IPP 4 to IPP 6, changes we are going to trillions of devices overtime.

JAMES: Right.

DEWALT: And security is really important, it is a part of that. So we share a similar vision.

(END VIDEOTAPE)

LAKE: That was the McAfee CEO there. Getting a little bit techy when they're talking, but we all know from our lives that connectivity is exploding. We are using more devices across everything. Especially these smart phones, the handheld computers. So, obviously the executive is excited.

What about investors? How are they reacting? We have mentioned that McAfee shareholders of course bidding up the stock, they are very happy. Good outcome for them. But analysts investors, a little bit more mixed when it comes to Intel. Some people are for the idea of them starting to diversify away from that courtship business. But is this the right direction? Security is a very competitive area. And not only that, McAfee has had some trouble, lately, most recently, in April with a glitch in an update that caused thousands of user problems. So they have had a little bit of a tough patch lately. Of course, there are going to be questions about whether Intel overpaid. So the Intel side of it, I think is a little bit more cautious and we're going to have to wait to see the verdict on that one.

QUEST: Maggie Lake, who is in New York with the nuts and bolts of the tale.

Joining us now from Santa Clara in California, Bill Kircos, Intel's director of communications.

Bill, I suppose first of all, congratulations. Anyone who manages to do a deal these days that hasn't leaked like a leaky sieve is to certainly to be congratulated. But now tell me, how doe this fit in with an Intel strategy where you are a chipmaker.

BILL KIRCOS, DIRECTOR OF COMMUNICATIONS, INTEL: Yes, I would argue- thank you-I would argue about the diversified comment.

So, here is our vision in McAfee and Intel, shared very closely together. Very soon in the next few years there is going to be billions of devices entering the Internet, going online. We have requests from sewing machine companies, carmakers, phone makers, just an unbelievable variety of companies are looking to add more PC like features and Internet access to their devices. And so people know us, Intel, as chip speed, and more recently, really great battery power sleek laptops. And we believe a third platform that we want to talk about now is security. It is kind of the Wild West, if you are going to be adding billions of devices to the Internet.

QUEST: Right.

KIRCOS: Both in protecting those devices and the server networks above them.

QUEST: But just as Intel has to be agnostic, to a certain extent about different PC manufacturers and different hardware manufacturers, so for instance McAfee has to continue to be agnostic about whether it goes into an Intel or any other sort of machine, powered by any other chip, doesn't it?

KIRCOS: Very true, that is why they are going to remain a wholly owned subsidiary. What they were doing yesterday, and the companies they were working with yesterday, will happen again, same as tomorrow. Very similar to an acquisition you are aware of we did a little over a year ago with Wind River. Wholly owned subsidiary, they service markets that are beyond Intel chips and also have customers that are, you know, none Intel chip customers.

QUEST: When you look, though, and we'll be talking later, we are hearing from the CEO of SAP, the software company, in tonight's program. This diversification into iPads, smart phones, a long way from the PC and the Mac. This is the true next stage of the revolution, isn't it?

KIRCOS: I'd argue that the PC and laptop business is pretty strong for us. Analysts are predicting 24 percent growth in that area. Great business for us, and what we are talking about today is hey, again, revolution going on in the billions of connected devices that are going to be hitting the Internet. We have a great chip called the Adam processor that is targeting a lot of those areas. Again, phones, cars, windmills, crazy ideas that people are putting Internet into.

So, I think we have a good strong business in our traditional PC laptop area, and server area, and we really are trying to offer people a more secure, faster, and lower power experience in the other connected devices.

QUEST: Bill, many thanks indeed. Doing a deal in the summer kept us all interesting. Again, congratulations. It is an almost impossible task to try and keep these things quiet. But-

(DESK BELL CHIMES)

Hey, you managed it. Bill joining me there from California, from Intel.

KIRCOS: Thank you.

QUEST: Now traders are making, in New York, made the most of the movements in the tech sector. Come and join me at the wall and you will see what I mean.

The shares of Intel, not a huge move, but they were down 3 percent when it struck the deal. Partly because it has agreed to pay a 60 percent premium over what the stock market thought McAfee was worth. Now, you can see beautifully, Intel down 3. That 60 percent premium has rocketed up McAfee's share price by some 57.3 percent. That is a comfortable gain, and it certainly-if you owned McAfee shares yesterday you are smiling all the way to the bank.

The drop in Intel shares is one of the factors pulling down the main market, though. Down a 170 points, 1.6 percent, 10,245. I don't think 10,000 is in jeopardy, certainly not this week. The Dow is down, the Nasdaq is down, the S&P 500 is down. Patricia Wu is at the New York Stock Exchange

And I know that the major force in the movement is more economic than corporate, tonight.

PATRICIA WU, CNN FINANCIAL CORRESPONDENT: Absolutely, Richard. Jobs, jobs, jobs, that is what it is all about. If I had a dollar for every time heard a trader tell me that today that these numbers are being driven by the jobless claims. Now, the jobless claims came in at 500,000. That is much higher than expected. It is also a psychologically damaging threshold. It is also the highest level since November and the third straight increase, Richard.

And you know, to make matters worse, the icing on the cake, as one trader told me, weak regional manufacturing report out of the Philadelphia region of the United States. The activity fell to a 13-month low. Now, usually this is not a number that we pay a lot of attention to, but the reason why it is throwing the market for a loop today is because that number is so unexpected. That drop was a surprise.

And you know the market doesn't like surprises. It does not like uncertainty. And that is why we are seeing these numbers today, Richard.

QUEST: Quick point, Ali and I, in our Q&A session are going to be talking about double-dip, coming up later in the program. I suspect, on Wall Street, the "double D" word is also being used?

WU: Absolutely. A lot of buzz about that one. I was just down on the floor, there are renewed fears of a double dip. Though the traders I spoke to said they don't think it is actually going to happen. But there are definitely renewed fears. Once again it comes down to uncertainty. And there are a lot of question marks in the air right now. The Bush tax cuts, will they be renewed? Corporations are worried about health care costs, so they are not hiring. So, therefore, if the corporations are sitting on the sidelines and not hiring, because they are waiting to see a sustainable recovery, well, it is a Catch-22, because you are not going to see a sustainable recovery until you see some hiring, Richard.

QUEST: And that is hopefully-you should join our-you should actually join Ali and myself, later. Patricia, many thanks, indeed.

OK. Eight weeks of campaigning, Australia heads to the polls on Saturday.

(DESK BELL CHIMES)

It is not long since the country got a new prime minister, now she is expected to be judged on her economic record of her predecessor as well. In a moment, QUEST MEANS BUSINESS.

(COMMERCIAL BREAK)

QUEST: On Saturday Australians will choose the next government delivering a verdict on how the ruling labor party has handled the economy. Australia avoided recession. The job market didn't get a way Scott free. As we covered this story Anna Coren has been following what has been a dramatic campaign.

(BEGIN VIDEOTAPE)

ANNA COREN, CNN INT'L. CORRESPONDENT: For the past eight weeks Australian politics has been an ongoing soap opera, consuming the nation and its highest office.

JULIA GILLARD, AUSTRALIAN PRIME MINISTER: I accept that the government has lost track. We will get back on track. Fighting for its political survival the governing Australian Labor Party, believing it could not win the next election with Kevin Rudd as prime minister unceremoniously dumped him as leader on June 24 and appointed his deputy Julia Gillard.

It was an unprecedented move and one many considered harsh treatment for the man credited with brining his party out of the political wilderness after 12 years in opposition.

Australia suddenly had its first female prime minister. Born in Wales, Julia Gillard, emigrated to Australia when she was four years old. Tough, ambitious and unconventional, Gillard defended her decision to live out of wedlock with her partner, hairdresser Tim Mathieson.

Her first job in office, striking a deal with the country's power mining companies on an unpopular tax against the industry that largely contributed to Rudd's dramatic downfall. With a spike in the polls, Gillard quickly called an election.

GILLARD: I will be asking Australians for their trust, so that we can move forward together.

COREN: But Gillard's honeymoon didn't last long.

TONY ABBOTT, AUSTRALIAN OPPOSITION LEADER: This government is so hopeless that just a month ago, in panic, they sacked their own prime minister.

COREN: The conservative coalition, lead by Tony Abbott, was swiftly gaining ground.

ABBOTT: If you elect Tony Abbott, you'll get Tony Abbot. If you elect Julia Gillard, you will get the faceless men.

COREN: The 52-year-old who once studied to be a priest holds conservative views on issues including abortion. But as the father of three daughters played the family card, he began to resonate with many in the electorate.

ABBOTT: I don't want to get ahead of myself, but sitting in the top chair.

A series of internal leaks, discrediting Gillard, also began to hurt her campaign, as it appeared someone within the party was trying to undermine her. And while the finger was pointed at Rudd, a claim he vehemently denies, her old boss hit the campaign trail in support of her and the party that knifed him.

KEVIN RUDD, FMR. AUSTRALIAN PRIME MINISTER: And I cannot, for one, stand idly by and what Mr. Abbot try to slide into office, by default, without any real scrutiny being applied.

COREN: The economy, and who best can manage it, is the key election issue in a nation that avoided recession during the global financial crisis. A wave of illegal immigrants and asylum seekers arriving by boat, is also a divisive election topic. And while Australia still remains part of the British Commonwealth, Gillard has proposed becoming a republic, once Queen Elizabeth, the Second, dies. A stance Abbott, a strident monarchist, firmly rejects. The most recent poll puts Labor ahead slightly, though with voting compulsory both camps are positioning themselves as underdogs.

GILLARD: It is a very tough, close contest and it will be a photo finish on election day.

COREN: Commentators say this is Gillard's election to loose. But come Saturday, the prime minister is hoping she can hold onto power, this time by winning a mandate from Australian voters. Anna Curran, CNN, Hong Kong.

(END VIDEOTAPE)

QUEST: So Australia was the only major developed country that didn't go into recession. And now the economy is moving gangbusters. For example, interest rates have risen six times and now stand at 4.5 percent. U.S. interest rates are just about zero. The IMF says that Australia's growth will be 3 percent in 2010. At a time with the U.S. is revising downwards its growth, as is the U.K. and other European countries; 17 years of growth and no recession.

But this is the big worry. Housing prices, is there an asset bubble building up in Australia. Up 18 percent so far in 12 months to June. Now, I spoke David Koch of our affiliate, Seven Network in Australia. And I began by asking David Koch what it was and what was going wrong with Julia Gillard's campaign?

(BEGIN VIDEO CLIP)

DAVID KOCH, SEVEN NETWORK: I think a couple of things, Richard. First of all, what a lot of people are saying, her dishonorable conduct, if you like, in getting rid of her former leader, Kevin Rudd. You remember Julia Gillard, just sort of two months ago, two and a half months ago, was the deputy to Kevin Rudd, in his first term as the Labor prime minister. She and a lot of the faceless political manipulators in the Labor Party decided, well, Kevin Rudd had to go. He was unelectable. And they put her in the top job. So that hasn't gone down well, particularly in Kevin Rudd's home state of Queensland.

And secondly, would you believe Australians have been highly critical of this government with the economic stimulus package that got us through the global financial crisis. And Australians believe that a lot of money was wasted, that there was a lot of mismanagement on behalf of the government.

QUEST: Right.

KOCH: And they are probably the two things that are working against her and have narrowed the gap. It all comes down to marginal seats in western working-class Sydney and also in Brisbourne, which is the former prime minister's hometown.

QUEST: If we look at the economy, viewed from up here in the Northern Hemisphere, you have never had it so good. You're getting stronger as it goes. Commodity prices are a boon and a benefit. It seems almost perverse the way this election is turning out.

KOCH: Australians have no idea how lucky they are. We have economic growth of around 3 percent. We have inflation in our central bank's target range between 2 and 3 percent. We have unemployment at 5.3 percent. We have strong banks. And we have sailed through this last global financial crisis.

And the two major parties are absolutely manic in getting our budget- the federal budget back into surplus within the next three years. Our government debt, after the stimulus package, will peak at 6 percent of GDP. And it is almost a race to see how quickly they can get it back into surplus, despite the fact, despite the fact that we might see another global economic downturn. They're saying, we don't care. The race is to get back to surplus. It is balmy. It just looks crazy and some people are saying, irresponsible.

QUEST: Finally, is the Australian electorate just a little ungrateful, perhaps, at what has-at the largess that has been dumped at their door.

KOCH: Look, I'm not sure ungrateful is the right term. I noticed-I think the thing is they haven't seen the hardship of the rest of the world. They haven't had to experience it. Our property prices have held up, in fact-in fact, grown. While property prices in Europe and the United States have dropped anywhere up to 30 percent. And Australians still have a job. Their house is still worth what it was, if not a big more. Things are pretty rosy. So, they are hard to please compared with the rest of the world, because they haven't gone through the sharpness, the harshness of the global financial crisis.

(END VIDEOTAPE)

QUEST: That was Koch from Seven Network Australia, joining me a short while ago.

We'll be back in just a moment. Q&A, head to head, on double-dip.

(DESK BELL CHIMES)

(COMMERCIAL BREAK)

ALI VELSHI, CNN FINANCIAL CORRESPONDENT: It is "Q&A" time. Hello, Richard.

QUEST: Good afternoon, Ali. Good evening from London.

On Thursday you and I, around the world, talking business, travel, and innovation. And doing battle.

VELSHI: And nothing is off limits. You just go to our blog at CNN.com/QMB, for Richard. Or CNN.com/Ali, for me. And tell us each week what you want to talk about.

Richard, what do we have this week?

QUEST: Today, the viewers-you-wanted us to talk about double dip. And we're not talking about going twice into the salsa or the ice cream.

Ali, you have 60 seconds to tell me something about double dip, starting now.

(DESK BELL CHIMES)

VELSHI: And I think our viewers were interested in talking about a double-dip recession. Something we have been hearing a great deal about for a long time.

A double-dip recession is a hilly economy. Basically, it looks like the letter W. The economy goes down, it settles around here, then is starts growing, it starts recovering a little bit. But then, it heads down again. And hopefully, at some point, recovers.

We thought we were here but maybe we are somewhere here. I mean, the interesting thing about a double dip is that your first dip is usually going to be the most meaningful, but from then on it starts to improve. But something then goes wrong, and you end up taking a double dip.

Now, it could just be that we have a slow recovery Richard. It may not be another recession. The recovery, though, may be jobless and that is what got people worried, because at 9.5 percent unemployment here, higher in some European countries, consumers are not taking to the streets and spending their money. And as a result we are not seeing the robust recovery that we should have been seeing-

(BUZZER SOUNDS)

VELSHI: -this long after a recession began.

QUEST: Well, what can one say about that? Except Ali is feeding his face with his props. OK, now my turn.

The double-dip recession. The boys give me 60 seconds on the clock.

Look, the truth of the matter is, when you talk about a double-dip recession what normally happens after recession is we end with a V shape. Straight forward, very fast down, very fast back up again. But as Ali pointed out a few moments ago, a few seconds ago, this time it has been very different. We have had this W.

Now, where are we in the W? Are we on this bit? No! We are somewhere round about here. And what we don't know is how fast this slowdown is going to come. Because what Ali didn't tell you is that nine out of 10 recoveries have a slowdown within them. But they don't turn into double-dip recessions. The sort of numbers that we are seeing at the moment, from the U.S. Treasury, these are the figures. The U.S. Treasury, the ECB, the Bank of England, they are all saying the same thing. Things are slowing down. But it doesn't matter whether it is a double dip or not.

(BUZZER SOUNDS)

Alan Greenspan called it a quasi recession.

VELSHI: That is really good, bringing economic reports as a prop. I think I win on the prop department, with edible props, Richard.

(LAUGHTER)

QUEST: All right.

VELSHI: All right. Time to separate the men from the boys once again, Richard.

QUEST: It is time for us to actually go head to head.

VELSHI: That's right.

QUEST: And that means the Voice.

UNIDENTIFIED MALE: Good day, gentlemen, it is time for a triple dip of Q&A. And let me tell you, the only props you'll need for this are your brains. Are you ready?

VELSHI: Ready.

QUEST: Yes.

UNIDENTIFIED MALE: First question, how many double-dip recessions have there been in the U.S. since the 1950s?

(DESK BELL CHIMES)

Richard, with an early ring.

(BELL SOUNDS)

QUEST: One, 1980.

(BELL SOUNDS)

UNIDENTIFIED MALE: Richard, you are exactly right. From 1980 to '82, and it took about five years for the jobless rate to drop back to levels preceding that period.

Richard on the board early.

Question No. 2: How does the International Monetary Fund define a global recession? A, a slowdown in global growth of 2 percent; B, a slowdown of 3 percent; C, a slowdown of 4 percent; or D, negative global growth.

(BELL SOUNDS)

UNIDENTIFIED MALE: Ali, that was you. What do you got?

VELSHI: D, negative global growth.

(BUZZER SOUNDS)

UNIDENTIFIED MALE: Unfortunately that's wrong.

Richard, care to ring in?

QUEST: Yes, I would go for, it is a bit of a guess, since Ali went for the one that I would have said. I'm going to go for A.

(BUZZER SOUNDS)

UNIDENTIFIED MALE: Oh, my goodness. I thought both of you knew the answer to this. But you are both wrong. It's B, a slowdown in global growth of 3 percent. Economist at the IMF state that a global recession is a slowdown of global growth of 3 percent or less. Commit that to memory.

VELSHI: Yeah.

UNIDENTIFIED MALE: By this measure, four periods since 1985 qualify.

VELSHI: Wow.

UNIDENTIFIED MALE: OK, Richard still leads, one to nothing.

This is for all the marbles. Question three: Who was it who originally said, a recession is when your neighbor loses his job, a depression is when you loose yours. A, Teddy Roosevelt; B, Harry S Truman; C, Harold Wilson-

(BELL SOUNDS)

UNIDENTIFIED MALE: Ali?

VELSHI: George Carlin, everyone knows that.

(BUZZER SOUNDS)

UNIDENTIFIED MALE: Wrong! Not even funny and wrong.

Richard, it is up to you.

QUEST: OK, it is either Roosevelt or Truman. I am going to go with Roosevelt, Teddy Roosevelt.

(BUZZER SOUNDS)

UNIDENTIFIED MALE: Richard, I'm sorry, you were so close. You should have gone with Harry S Truman. And that means the buck stops here, because according to the Library of Congress, Truman said it first in the magazine, "The Observer", published on April 13, 1958. Interesting tidbit, Ronald Reagan went on to use the quote himself, but he added the line, and recovery is when Jimmy Carter looses his job in the 1980 presidential election. And that means in the second round of "Q&A", Richard narrowly takes it, one to nothing.

VELSHI: Well, thank you, Voice.

UNIDENTIFIED MALE: You're welcome, Ali.

VELSHI: That is all from us for this week. Remember, we are here each week, Thursdays at 2:20 p.m. Eastern Time; 18:20, your time, Richard?

QUEST: Indeed, on QUEST MEANS BUSINESS, where it is 20:29, at the moment.

Ali, have a lovely week and I will see you when we do battle next week.

VELSHI: All right. We'll see you next week, Richard. Have a good one.

QUEST: In just a moment, corporate spending on IT is on the comeback trail. That's what the heads of software giant SAP and Sybase -- or Sybase -- have been telling me. We'll find out how and why they're so bullish on their markets and their joint strategies, in a moment.

(COMMERCIAL BREAK)

QUEST: Hello. I'm Richard Quest, QUEST MEANS BUSINESS.

This is CNN. And here, the news always comes first.

Now, our main story tonight, the last American combat convey has now left Iraq. Another 6,000 troops still must leave by September the 1st to meet Washington's deadline for the end of all U.S. combat operations there. Even so, there will still be 50,000 non-combat U.S. troops remaining in Iraq who will act as advisers to the Iraqi military.

Dozens of Roma, also known as gypsies, have arrived in Romania after France put them on two flights and expelled them. French officials say they had over stayed a three month limit to find work or start their education. French immigration authorities say two more flights will leave on Friday.

The United Nations meets soon today to discuss how to speed up and drum up more international aid to Pakistan. The U.S. secretary of State, Hillary Clinton, is expected to increase American flood aid to the country to $150 million. Regular U.S. aid to Pakistan will also be diverted to flood relief.

Massive flooding in Pakistan has killed more than 1,500 people and left an estimated four million people homeless.

Canadian police made a startling discovery during a recent raid. They found 14 wild bears guarding marijuana plants in the western part of the country. The police say the pot growers used dog food to lure the animals onto the property to deter thieves. However, the plan didn't work very well. When the cops arrived, the bears just sat around watching.

So, as we've been reporting, an end of an era in Iraq, as the combat troops pull out and now, of course, the Iraqi military bears the burden of the country's defense.

CNN's executive producer, Suzanne Simons, joins us now live from Atlanta.

SUZANNE SIMONS, CNN EXECUTIVE PRODUCER: Richard, how are you doing?

Good to be with you.

It's quite a development that we're seeing happen in Iraq, as we see a lot of these troops move out of the country and a lot of talk of now the contracting force building up in the country, much like what we've seen happen in Afghanistan. A lot of these contractors are reportedly doing things in Iraq -- or they will be in the future -- like training up the border security forces. Not so difficult to understand how that might come together, if you do take a look at the what's going on in Afghanistan, where literally the big, big task of training the Afghan national police has fallen almost squarely on the shoulders of private contractors.

So there are a lot of questions going around today, Richard, about who's going to be charged and...

QUEST: But...

SIMONS: -- how much of a presence those contractors are going to have in Iraq.

QUEST: OK, we need to -- these contractors, now, we're familiar, of course, with Blackwater. We're familiar with Halliburton, all the contractors that, if you like, did the logistics for the war -- the war itself. But tonight, what about external business -- contractors who are able to come in and actually start self-sustaining businesses, even though that was at some risk and some danger?

SIMONS: Well, you know, it -- but it's happened and it's happened a lot. And it's a big business. I mean, Richard, if we go back to 2003, just after the Iraq War started, which was really the beginning of this privatization of war, if you will, we were seeing contracts given out by the United States Pentagon in the amount of about $298 million, was one that they had given to a British company at the time to oversee all these smaller units of people who are taking on the logistical task for the military.

What happened since then is that it's mushroomed out of control to the point where there's been very little oversight, very poor management. There's been a lot of contracts fraud. It's created a cottage industry for the FBI as they start investigating now allegations of fraud. And -- and now, it's not $298 million as the largest contract ever awarded to a civilian agency, it's billions and billions of dollars...

QUEST: Right.

SIMONS: -- with no end in sight. I mean that's what you and I should be doing instead of sitting here talking, we should be starting up one of these businesses.

QUEST: Well, yes, of course, it's always -- it's a risky business and more than one contractor has learned that (INAUDIBLE) in physical security.

But, Suzanne, you -- to develop that further, you see, when you've got that sort of money sloshing about, the billions, why not fraud or mismanagement or just simply natural wastage, it's going to be in the tens of millions, isn't it?

SIMONS: Oh, absolutely. Absolutely. I mean the FBI literally -- I wasn't joking. It's now like a cottage industry, something that they really didn't have that they focused on before in the last seven years or so has really become an entire part of what they do -- investigating allegations of fraud. There have been numbers of the U.S. Military who have been convicted who are now in jail because they had been given expensive gifts, they had been promised, you know, wonderful vacations on tropical islands somewhere.

And -- and after spending a lot of time, like these guys have spent in these war zones for rotations that go on and on, the temptation for some of them was just a little bit too much to handle.

And so now, we've seen a lot of that come out.

QUEST: Right.

SIMONS: And unfortunately, we're going to see more contractors instead of fewer contractors. We're probably going to see more allegations of corruption and fraud.

QUEST: You just -- finally, we must just end briefly. But that seems to me to be the crucial point now. The combat troops are going home. The privateers may well be moving in.

SIMONS: That's right. Well, if the military is not going to stick around to train the Iraqi guards, border patrol, what -- what have you, the Iraqi national police any long...

QUEST: Right.

SIMONS: -- then who's going to do it?

Right, who's going to do it?

The private contractors are going to do it. The Department of State it's going to hire private contractors to do it.

QUEST: Simons and Quest, a fully owned subsidy.

SIMONS: I kind of like it.

QUEST: All right. Well, yes. All right, she likes it because Simon and Quest, not the other way around. All right.

SIMONS: It's perfect. Yes.

QUEST: Many thanks, indeed, Suzanne, for that interesting look at contractors.

SIMONS: Sure.

QUEST: In a moment, it's been a day to remember -- a thousand in Britain. It was that day when the results came out for the so-called A levels.

Who made the grade, what happened to those who didn't make it and why they're calling this year the perfect storm for jobless and education.

(COMMERCIAL BREAK)

QUEST: In Britain today, there's been ecstasy for some and agony for others -- the day that hundreds of thousands of school leavers (ph) learned their exam grades. And upon those grades, whether they qualify for the college and university of their choice. Tens of thousands could be left out in the cold by an education system grappling with budget cuts that doesn't have enough places to go around.

It's not just the U.S., that's in the U.K. that's suffering this. Of course, other countries in Europe are suffering the same problems.

But today, we spent the day with a student who's been finding out about the pressure.

(BEGIN VIDEO CLIP)

JAKE STRONG-JONES, STUDENT: I'm Jake Strong-Jones. I'm 18 at the moment. And I am hopefully going to university next year. I started studying for my A levels two years ago for -- it was a natural progression in my school career. And I just felt it was the right thing to do. I decided a subject I enjoyed and I'm glad I did it.

I really enjoy my subjects and I don't want to lose them. I find them absolutely fascinating to study. And so I wanted to continue doing them, really. And the university seemed the perfect place to do it, because it is studying in an in-depth way. There was a lot of pressure. There were 70 people applying for a few places. The government has been publishing articles most days on how terrible it is for people to actually get in, how difficult.

It made me work a lot harder, because I knew that I would have to. But it's mainly making me worried now, because I don't know whether I have actually got in or not.

UNIDENTIFIED FEMALE: Want to come in?

Thank you very much.

STRONG: I feel quite nervous, actually. I'm hoping I've done well, but we'll see what happens.

UNIDENTIFIED MALE: Yes?

That was pretty good, huh?

STRONG: All right.

I feel fantastic. I've just got my results and the results are ANTVs (ph), which is my offer. And so I'm definitely going to the university next year. It's fantastic. This isn't what I was expecting. It was not as amazing as I could have hoped, but it wasn't that bad either. So I'm very pleased.

My family and friends will be happy that I -- the results are actually in, that the exams are finished. But they'll be especially pleased now that I'm definitely going to university next year.

UNIDENTIFIED MALE: Oh, you got in?

STRONG: Yes.

UNIDENTIFIED MALE: You got in?

STRONG: Yes.

UNIDENTIFIED MALE: (INAUDIBLE)

STRONG: I'm now happy.

Next year, I will spend the year studying English and philosophy at the University of East Anglia up in (INAUDIBLE). And it will be a fantastic time. I'll be learning exactly what I want to learn and I'm looking forward to it.

It is a huge weight off my shoulders. I've been very happy today. And I'm planning on celebrating this afternoon and evening. And it's been a real experience. It's been really hard work, but it's over, which is a great feeling.

(END VIDEO TAPE)

QUEST: Jake Strong-Jones is with me now.

Simon Lloyd, director of human resources at Santander, who says there are career prospects for young people who don't go to university, is also with me.

Congratulations, Jake.

You said then in that report it's over now. I've got news for you, it's just beginning, mate. Just beginning.

What do you want to do with it all when you're finished?

STRONG: When I'm finished, I'd like to either start teaching or go into some sort of journalism. I haven't decided what.

QUEST: Right.

STRONG: But...

QUEST: Did you ever think about -- I mean was it ever an option not to go into university or to go for some other -- some other avenue?

STRONG: No, it was a natural progression, because I do -- these are subjects that I want to study. And if I can study them, I want to study them in-depth. And the university is the best place.

QUEST: Modesty aside, were you ever concerned, knowing that this year is pretty difficult -- and some say unique, for jobs and places -- that you might not make it?

STRONG: Yes. I was very worried in the last week for certain. And but before that, I felt relatively confident.

QUEST: Simon, you're offering an alternative, in many ways, to -- through Santander to the traditional graduate scheme.

SIMON LLOYD, H.R. DIRECTOR, SANTANDER: Yes. We've just launched a school leavers (ph) program earlier in the year to give an opportunity for people who want to make a career in banking who don't, perhaps, want to go to university first. A university degree is one way to have a great career. It's not the only one.

QUEST: But, Simon, you want people who -- I mean is this a back door for people who couldn't get into university or failed to get their grades?

And how are you going to guard against that?

LLOYD: No, absolutely not. We've had a considerable amount of interest in the scheme. We had about 60 applicants for every place.

QUEST: Sixty for every place?

Doesn't that tell us more about the economy and the economic position at the moment than your scheme, with respect?

LLOYD: I think it tells us more about the people who want to come and work for Santander and work in banking. But in reality, I think it is a quality of people that we're looking for that, you know, we have turned a number of people down because we want the right quality. It's not a back door route into banking at all. People who come and join us on this scheme will study and they will get a very good qualification through the scheme.

QUEST: Jake, any of your friends didn't make it, what are they going to do?

STRONG: I think they're in a bit of a -- they're unclear at the moment. They're seeing if they can go through to other universities. If they decide not to, then they will either get a job and make some money and just survive until next year or try a new career.

QUEST: But, you see, but your generation is still putting a huge emphasis on the university degree. And as Simon points out, there are many other ways of getting into the workforce successfully without the degree.

STRONG: There are, indeed. But this does seem like the most logical step. It's the most widely accepted step. And it's often the most expected step, as well.

QUEST: Is your way forward as -- you and I are old enough to remember technical college, vocational colleges, polytechnics and a variety of them.

Are we going to move back to that situation, where people will leave school and more people will go directly into the workforce?

LLOYD: I don't think we've ever moved away from it, because I think, you know, people, for a number of years, have chosen alternative ways to develop their career, either by going straight into work, by going to university but taking some time out and then coming back. There are always different routes there.

QUEST: Santander, of course, massive bank -- across the continent of Europe.

Do you have something that you can offer because of that?

LLOYD: Yes...

QUEST: The depth of it?

LLOYD: Yes. I think, you know, we're a very successful bank...

QUEST: Well, sure.

LLOYD: -- which is one of the key pieces. And, you know, we are growing. We have the opportunity to offer people careers not only in the United Kingdom, but globally. And one of the interesting things I noticed in the statistics today among modern languages generally, they have been declining in popularity. Spanish was actually up, which, given that we're a Spanish bank, was of great interest.

QUEST: Excellent.

Thank you very much.

And the last question, congratulations to yourself.

STRONG: Thank you very much.

QUEST: There's only one problem, Jake. You're going to East Anglia?

STRONG: I'm going to East Anglia.

QUEST: Roughly -- roughly how much debt do you think you're going to end up at the end of your three years at East Anglia?

STRONG: I'd say about 8,000 pounds, at least.

QUEST: Eight thousand. It's about $12,000. There is the man. He's from Santander. Have a word with him. He'll see you around before we're finished.

Congratulations and many thanks to you.

In just a moment, IT spending by companies is about to take off once again. That's the word from the world's biggest software makers. You heard about it earlier in the program. When we come back after the break, the chief exec of SAP.

(COMMERCIAL BREAK)

QUEST: An IT revival -- there was no mincing of words today from the chief exec of SAP. The company says its customers are crying out for systems to help boost productivity and what's more, the chief exec tells us tonight on this program they're prepared to spend big if necessary.

SAP says it's better placed than ever to capitalize. It just bought Sybase, the U.S. software developer. It's a database software. They've been talking about their joint strategy for achieving total wireless mobility. Sybase and SAP -- it's all pretty complicated stuff at one level.

But when SAP's chief exec, Bill McDermott, and John Chen of Sybase, which will be an independent unit, joined me from Michigan, I started with Mr. Chen.

So let's face it, we know SAP's got issues, but is that the bit that Bill needs?

JOHN S. CHEN, PRESIDENT & CEO, SYBASE: Well, they're more complementary. We also needed the SAP big channels and reach in the customer base. So, yes, you know, but what -- what Sybase has done in the very early days, probably around eight or nine years ago, after the dot-com busted, we -- we looked at our strength and decided to leapfrog everybody and -- and then invest into the wireless communications and wireless computing.

You know, our vision at the time was every enterprise in the world will have to deal with these little devices that, at the time, obviously, are -- are clunky and doesn't do a lot of things and maybe just an address book and all that good stuff.

And -- and so, we decided that we were going to get ahead of everybody and -- and do something that the customer doesn't even need they know at the time. They -- they didn't know they need at the time. So -- so we embarked on this journey.

So after eight years, we became the market leader.

QUEST: Is the crisis that led to the February co-chair and the whole incident earlier this year, is that crisis over?

And if so, how is it with two -- two heads at the top?

BILL MCDERMOTT, CEO, SAP: First of all, it's great with two heads at the top. We like to say two is better than one. And that, of course, is built on a foundation of trust. And if you can be in two places at one time, you get double the amount of work done. Therefore, the customer gets double the value. So does the shareholder.

Now, in terms of the crisis, the beauty of SAP is we have a very successful company, a market leader for more than 38 years. And we have a broad portfolio. So we're very global -- 130 countries around the world. We go to market in 25 industries and we serve small, medium and large customers everywhere.

So if one economy is struggling, another one will pick itself up. And we adjust our cost base accordingly, so we remain a highly profitable company for shareholders. I personally am very optimistic. I see a much better environment than we saw in 2009 and I'm starting to see, in the crystal ball, a return to 2008 levels, which is what all information technology companies and leaders are looking for.

QUEST: Now, that's a -- now that's a -- a very bullish statement. That's effectively saying that there may be a slowdown in the macroeconomic environment, but that IT and CAPEX is coming back.

MCDERMOTT: I agree with that. And the reason I say that is there's a lot of pent up demand for mission critical, value driven business investments. The idea behind SAP and Sybase is a CEO and a management team has a strategy for the company. You cannot execute that strategy without a clear IT roadmap to deliver the value or the business outcome to the shareholder. And, therefore, this would be considered a strategic investment. And I do see the flow coming back to strategic investments.

(END VIDEO TAPE)

QUEST: Interesting stuff. Very bullish statement from the chief exec of SAP.

The weather forecast now.

Hopefully Guillermo has got some interesting and bullish news for those that are maybe just hoping to eke out a little bit more of summer.

GUILLERMO ARDUINO, CNN METEOROLOGIST: Oh, I have to give you an update. I'm going to change, a little bit, my forecast from yesterday for London. I think Saturday is going to be rainy. Thank you very much. Monday -- Sunday and Monday probably sunshine there.

And also in Spain here, we're -- we're expecting some intense rains and Cornwall and the western parts of England is where we may see some more rain compared to everywhere else in Britain in the next 24 hours. So here you have it. So take cover. It is coming, especially north of London, as you see. The rain is coming back. Then we will get some clouds. And then it all will start again.

But it's light rain showers in London, right?

And then elsewhere, things are fine. Look at -- look at Russia. This appears -- this looks like new. I mean the green contours -- we have not seen that in a month. We're going to check out what's the temperature at this very moment in a second.

Back to the satellite. In the Alpine Region, where we see some clouds, that's about it. Nineteen in Moscow and colder to the north. Great news. Let's see the extended forecast. We'll see rain Thursday and Friday. And then Saturday, we'll see sunshine in here, so the rest of today, it's going to be cooling down into Friday.

So finally, huh?

Well, here is where we are going to see the storms. And that coincides with those green areas that I was talking about. And then the rain here in the south. Look at Britain -- nothing is going on, even though we'll see some rain, especially in the west.

Copenhagen, some showers moving in. But we will see no problems at airports at all, despite the rain and the winds in Dublin and nothing here -- Berlin, Milano, Rome, Barcelona, Madrid all fine.

Update -- a quick up -- a quick update on Pakistan. The weather is better, but we have a new problem. It's the heat. And in India, the rains are still very much in force there. Back to Pakistan. Look at these temps -- 55 there. Like 125 degrees Fahrenheit.

Before you ask, Richard, it's a cool 54, this heat index, but very uncomfortable in the areas that are flooded -- Richard.

QUEST: Guillermo, many thanks, indeed.

We will follow that and we look forward to that.

Many thanks.

A Profitable Moment is after the break.

(COMMERCIAL BREAK) QUEST: Tonight's Profitable Moment.

Double dip or not -- it remains the pressing issue. Economists believe that the major economies will probably escape the worst. They believe that what we're seeing is the slowdown that we always experience after a recession. Pent up demand has been unwound. A restocking of inventories is now complete.

So why should we be more concerned than usual?

I'll tell you. Because unemployment remains stubbornly high. It seemingly isn't responding to the massive fiscal and monetary stimulus that's been poured into economies. And don't forget, in Europe, the post- recession austerity measures -- they're more severe than you'd normally get after fiscal stimulus.

There's little room to maneuver. Governments are worried about deficits. Central banks are worried about inflation. Consumers are worried about debt. Everybody's worried about their job. Alan Greenspan summed it up, he really did. There's a pause in a recovery. It's entirely normal. The problem is, it feels like a quasi recession and there isn't much difference.

And this is QUEST MEANS BUSINESS tonight.

I'm Richard Quest in London.

Whatever you're up to in the hours ahead, I hope it's profitable.

"WORLD ONE" starts now.

END