Warren Buffett, who completed his biggest acquisition in February, is positioned to pursue another “elephant”-sized deal after cash at his Berkshire Hathaway Inc. climbed to the highest in more than two years.

Berkshire’s cash holdings jumped 23 percent to $34.5 billion in the three months ended Sept. 30, the Omaha, Nebraska- based company said Nov. 5 in its third-quarter report. That compares with $30.6 billion at the end of 2009, about six weeks before Berkshire’s $26.5 billion stock-and-cash takeover of railroad Burlington Northern Santa Fe Corp.

Buffett, 80, has transformed Berkshire from a failing textile mill to a $200 billion seller of insurance, electrical power and consumer goods through four decades of acquisitions. The company doesn’t pay a dividend or buy back stock, leaving its chairman with the task of investing earnings. In 2007, Buffett likened himself to a hunter who ignores “the pursuit of mice” in favor of the world’s biggest living land mammal.

“The fact that he’s got $34 billion means that he can go hunting again,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP. “Burlington Northern was the first really big elephant that came along. And he’s got the cash to do it again.”

Berkshire is benefiting from a stock market rally that boosted the value of its equity portfolio 5.4 percent in three months to $57.6 billion and an economic recovery that contributed to a 21 percent increase in third-quarter revenue. Fort Worth, Texas-based Burlington Northern posted $4.39 billion of revenue in the period, a 22 percent gain from a year earlier, when it was an independent company.

Buffett ‘Hopeful’

“We are hopeful that recent economic improvements will continue over the remainder of 2010 and beyond,” Berkshire said in the report.

Book value, a measure of assets minus liabilities, rose to a record $149.7 billion at the end of September. Third-quarter net income slipped 7.7 percent to $2.99 billion as the weakness of the U.S. dollar contributed to losses on derivatives tied to equity markets. Berkshire’s cash was the most since the first quarter of 2008 when the company disclosed $35.6 billion.

The cash hoard will grow with the termination of financing deals that Buffett struck during the credit crunch. This month, Swiss Reinsurance Co. agreed to pay Berkshire about 3.7 billion Swiss francs ($3.85 billion) on Jan. 10 to exit a 2009 deal that cost Berkshire 3 billion francs and pays annual interest of 12 percent. Goldman Sachs Group Inc. and General Electric Co. are weighing the return of $8 billion that Buffett agreed to inject in 2008 for securities paying 10 percent.

Investment Income

“Based on current market conditions, reinvestment of any redemption proceeds would likely generate significantly lower investment income in the future,” Berkshire said in the report.

Berkshire sold stocks for $1.8 billion in the third quarter and invested about $600 million on equities in the period. Buffett said last month that buying bonds after yields fell would be a mistake.

Buffett is “ready to act” if a $10 billion deal is offered, he told shareholders at his company’s annual meeting on May 1. The next day at a press conference, he said he expected few opportunities because as Berkshire grows, larger acquisitions are needed to meaningfully add to earnings.

Potential targets may demand higher prices after advances in the equity and debt markets made assets more expensive and gave buyers access to cheaper financing.

Stock Market Rally

The Dow Jones Industrial Average rose on Nov. 5 to its highest level since before Lehman Brothers Holdings Inc.’s 2008 bankruptcy. The Standard & Poor’s/LSTA US Leveraged Loan 100 Index climbed for a second week, rising 0.61 to 91.95 cents on the dollar on Nov. 5, the highest since May 5. Prices on the index, which tracks the 100 largest dollar-denominated first- lien leveraged loans, are up from 87.68 cents at the end of last year.

Berkshire, which ended 2007 with $44.3 billion in cash, may allow more liquidity to build if it doesn’t find deals at the right price, said Glenn Tongue, a partner at Berkshire shareholder T2 Partners LLC.

“There is no way this is cash burning a hole in their pocket,” said Tongue. “Berkshire’s acquisition appetite is voracious, yet disciplined.”