In a case of a big fish being swallowed by an even bigger fish, Cisco Systems Corp. struck a $6.9 billion deal to acquire Scientific-Atlanta, the second-largest supplier of digital cable set-tops in the United States.

In addition to picking up S-A's Explorer line of boxes, which includes models that support high-definition and multi-room digital video recording applications, Cisco will also obtain the headend component and what amounts to the keys to the digital cable castle: S-A's proprietary PowerKEY conditional access (CA) system.

Done deal: S-A chief Jim McDonald (left) and Cisco President and CEO John Chambers.

The deal will give Cisco a significant push with its plans involving digital video and converged IP-based services.

"Moreover, Cisco's international presence and IP leadership will also create strategic synergies that accelerate the combined growth opportunity," said John Chambers, Cisco's president & CEO. The combination of Cisco's Linksys division with S-A "will extend Cisco's leadership position across the entire networked digital home," Chambers added.

The linkage to Linksys will also pair S-A with a well-known consumer brand, should Cisco decide to leverage the deal to push Linksys-made set-tops and other digital devices directly to consumers.

Cisco, which will obtain a company founded in 1951, also gets its hands on S-A's wide range of transmission gear.

Once the deal is closed, S-A will become a division of Cisco's Routing and Service Provider Technology Group, headed up by company SVP Mike Volpi. S-A Chairman, CEO & President Jim McDonald will report to Volpi.

On the financial end of the deal, Cisco will pay $43 per share in cash in exchange for each share of S-A.

The companies said their respective boards have approved the acquisition.

Once closed, the combined entity, once fully integrated, will certainly apply even more pressure on an already intensely-competitive field.

The agreement was only a couple of weeks old before some shareholders called it into question.

Scientific-Atlanta said it received two purported class action lawsuits from shareholders who are apparently unhappy with the terms of the deal.

The suits allege that S-A's directors and officers "breached fiduciary duties" owed to shareholders in connection with the deal.

"The company believes that the complaints are without merit and intends to defend the actions vigorously," S-A said, in a prepared statement. The company added that it "engaged in a thorough and deliberative process to obtain the best transaction at the highest price available for its shareholders."

Although some shareholders are fighting the financial terms of the proposed marriage, one analyst sees it as "the right move" for Cisco as the technology behemoth sets its sites on the telco sector.

Strategically, the fusion will create "one-stop shopping" for the converging broadband access and entertainment sectors, noted Detecon Inc., in its summation of the multi-billion dollar deal.

"The acquisition makes sense both tactically and strategically," said Detecon CEO Eckart Pech. The deal, he added, "compensates for Cisco's inability to play a significant role in telco infrastructure build-outs aimed at offering a full portfolio combining voice telephony, video entertainment, high-speed Internet access and wireless services."

That's important, he said, if Cisco hopes to loosen the grip Alcatel has on that particular market. Adding S-A will also provide Cisco with video expertise and an entrée into the residential set-top market, he added.

He warned, however, that integration of the two companies and their differing cultures will be difficult, at best, noting that Cisco's two largest acquisitions to date—Cerent in 1999, and Statacom in 1996—were much smaller companies than S-A.