It all started probably two weeks ago when words were swirling about Alibaba’s potential acquisition of K-Touch, China’s smartphone vendor. The rumor has never been confirmed or denied by both companies. And now the latest update says that one exec of K-Touch said it’s actually Aliyun, the cloud computing subsidiary of Alibaba will be merged into K-Touch. Still, neither made any response yet.

People who revealed the information said the two companies will make an announcement in the coming month though.

The potential merger means that Alibaba will spin off Aliyun and put it into another company. According to people familiar with the matter, Jack Ma, founder of Alibaba commented that the new company doesn’t have much to do with Alibaba except that Alibaba will be one of its stakeholders.

As the research and innovation frontier of Alibaba, Aliyun has worked out many cutting-edge technology and products including elastic, on-demand, cloud-based storages for site builders, cloud-based servers, YunOS and so forth. The research arm also developed an Alibaba smartphone which was OEMed by K-Touch, so it’s totally a surprise that the two agreed to a deal.

Aliyuan now has a total payroll of about 1200 people, the subsidiary is mainly devoted to its own mobile operating system YunOS and providing IT infrastructure to small websites.

One guess is that the success of Leijun’s Xiaomi Mobile prompted Alibaba to make a bold move. There years after its founding, Aliyun still didn’t serve Alibaba too well.