The deal, Cisco's largest in terms of revenue and headcount, capitalizes on a business that's expected to explode as telephone companies deploy fiber-based networks capable of carrying TV signals and broadcasters shift to digital transmissions.
It fits into Cisco's strategy of expanding into areas that are moving toward standards on the language of the Internet, a transition that creates an opportunity to grow revenue with new business and enhance its traditional routers and switches that direct data over networks.
"Video is emerging as the key strategic application in the service provider triple play bundle of consumer entertainment, communication and online services," said John Chambers, Cisco president and chief executive. "The addition of Scientific-Atlanta further extends Cisco's commitment to and leadership in the service provider market."
For Scientific-Atlanta, the deal is expected to bring more capital and fuel its expansion beyond cable TV companies that have been relatively slow to introduce new technologies to customers, said Josh Bernoff, an analyst at Forrester Research.
"Cisco has struggled to succeed both with telephone and cable companies. Scientific-Atlanta is sort of in a position where innovation and capital push would be helpful for them," he said. "We think this is going to make some real changes in the industry."
Cisco is paying $43 a share for Scientific-Atlanta, which competes primarily against Motorola Inc. in making set-top boxes for television programs and movies-on-demand. That is a 3.7 percent premium over its closing price on Thursday.
Cisco said Scientific-Atlanta will become a division of its routing and service provider technology group, led by Cisco Senior Vice President Mike Volpi. It also identified it as the eighth of its "advanced technologies," which means it expects the business to generate more than a billion dollars in revenue within five to seven years.
Jim McDonald, Scientific-Atlanta's president and chief executive, said the deal arose in part because customers are now expecting bundled services.
"These customers want more complete integrated solutions from fewer vendors," said McDonald, who said he will remain with the company for two years.
He said the purchase will help Cisco reduce the complexity of data transfer to service providers and other customers.
The deal, which was approved by the boards of both companies, is expected to close in the third quarter of Cisco's fiscal 2006 calendar, pending closing conditions.
San Jose-based Cisco said it expects the deal to be neutral to its fiscal 2006 earnings, while slightly boosting its fiscal 2007 profit before items. Cisco said it will finance the transaction with cash and debt.
Analysts expect Cisco to earn $1.03 per share for fiscal 2006, and $1.18 per share for fiscal 2007, according to a Thomson Financial survey.
Scientific-Atlanta said last month that its fiscal first-quarter profit grew 9 percent to $60.7 million, but sales of $490 million fell shy of Wall Street's expectations.
Earlier this month, Cisco said its fiscal first-quarter profit slipped as it expensed employee stock options for the first time and the company predicted weaker-than-expected sales. The company has its core business of routers and switches that direct data traffic over the Internet as well as its advanced technologies.
Other advanced technologies include as storage, Internet telephony, wireless and security products. Most recently, it announced its seventh, a product for small businesses to receive services over the Internet.