Shares of eBay, which also reported earnings per share a penny above Wall Street expectations, jumped as much as 12 percent. The stock was up 2.9 percent in premarket trading Thursday. (Click here for the latest quote.)
Donahoe said he had heard Icahn out but rejected his proposal. He added that the company intended to step up investments to safeguard the market position of the thriving payments service, which may exert pressure on margins.
Donahoe told Reuters in an interview on Wednesday that his company started seeking advice from its financial adviser, Goldman Sachs, five days ago, following Icahn's letter to eBay.
(Read more: Carl Icahn owns 0.82% of eBay and has nominated two directors)
Icahn's proposal comes as the billionaire investor is urging Apple to share more of its $146 billion cash pile with shareholders. The activist is demanding Apple do an additional $50 billion in share buybacks, which the company is advising shareholders to reject.
Icahn did not respond to requests for comment.
"I expect it to be a battle," BGC Partners analyst Colin Gillis said, citing eBay's longstanding opposition to a PayPal spinoff. "One of the reasons for that is because for commerce and payments, you need to remove as much friction from those two systems as possible. If you separate it out, you put more friction between" them.
PayPal started life as an independent company, founded in the late 1990s by technology entrepreneurs including venture capital investor Peter Thiel.
PayPal battled with eBay for supremacy in the then-emerging online payments market. But soon after it went public in 2002, eBay acquired PayPal for $1.5 billion. Today, its growth outpaces the rest of the company and it accounts for a large chunk of eBay's overall stock market value.
The unit has been a key driver of eBay's share value, as the company struggles to compete with larger rival Amazon.com.
(Watch: Icahn: I never said I own Hertz)
Analysts have estimated that PayPal, which already yields 40 percent of the company's revenue, may account for as much as half of the corporation's market value, which now stands at about $70 billion.
Icahn is known for decades of strong-arm tactics including proxy fights against major corporations. This month, he bought shares and derivatives giving him a 0.8 percent economic interest in eBay, and nominated two of his employees to the eBay board. Those employees were not identified.
"Our directors have deep experience in the technology and financial services sectors, and a track record of value creation. This is the standard by which all future candidates will be assessed," Donahoe said on the call.