Cisco said that the NDS acquisition, its biggest since the purchase of Norway's videoconferencing company Tandberg for $3.3 billion in 2009, is a strategic fit for its Videoscape video system.
NDS software is used by a third of the world's pay-TV operators, including Sky and Sky Italia, to deliver encrypted content through TVs and other devices.
News Corp acquired NDS in 1992 for $15 million. The firm went public in 1999 but was bought back a decade later by News Corp and private equity firm Permira, when it turned into a private company.
It is thought that News Corp will earn around $1bn from the sale of NDS to Cisco, while Permira is likely to earn $2bn.
Analysts said that it made sense for News Corp to sell its stake as it fitted with the firm's strategy of offloading assets that it does not directly control.
For Cisco, it gives the firm strong in-roads into emerging markets such as India and China, where NDS already has deals with TataSky and CCTV respectively.
"Our strategy has always been driven by customer need and on capturing market transitions," said Cisco chief executive and chairman John Chambers.
"Our acquisition of NDS fits squarely into this strategy, enabling content and service providers to deliver new video solutions that leverage the cloud and drive new monetisation opportunities and service differentiation."
NDS executive chairman Dr. Abe Peled added: "Cisco and NDS are helping drive the transition that will enable service providers and media companies to offer new revenue-generating video experiences.
"NDS's open software video platform and services are highly complementary to Cisco technology, and together we are uniquely positioned to enable service providers to deliver fresh and exciting multi-screen video services to their customers."
The boards of Cisco and NDS have approved the deal, which is expected to close in the second half of this year.
However, the sale comes ahead of a BBC Panorama documentary that is expected to examine allegations against NDS from broadcaster Canal+ dating back to the early 2000s.
Pay-TV firm Canal+ filed a law suit in California in 2002 alleging that NDS "spent large amounts of money and resources" to hack smart cards used by its subsidiary in Italy.
NDS described the lawsuit at the time as "outrageous and baseless", but the dispute was ended when News Corp acquired Canal+'s Italian operation and merged it with Sky Italia.
Interestingly, NDS was mentioned in a lawsuit lodged by News Corp shareholders against the firm's chief executive Rupert Murdoch and the board, alleging corporate misconduct that went beyond the phone hacking scandal at UK paper, the News of the World.
The lawsuit cited another case from 1992 in which Vivendi and EchoStar also accused NDS of illegally extracting the code from smart cards used to unscramble satellite TV signals.
It was alleged that NDS posted the Vivendi code on the web, enabling hackers to access the broadcasts for free and inflict more than $1bn in damages on the rival operator.
Jay Eisenhofer, a lawyer representing the News Corp shareholders, said at the time of the filing that the cases suggested a wider culture of impropriety at News Corp, particularly as members of the NDS board were also on the board of News Corp.