The investment comes at a time when the gambling industry has been ravaged by government restrictions on movement due to the COVID-19 pandemic, as well as fears about public gatherings.
MGM reported a 91% fall in revenue in the latest reported quarter and has slashed its dividend to weather the impact of the health crisis on its financials. Shares of the company have sunk more than 35% this year.
MGM's online gaming business, which currently constitutes a tiny portion of its revenue, was what initially attracted Diller, the billionaire told shareholders in a letter.
"MGM presented a "once in a decade" opportunity for IAC to own a meaningful piece of a preeminent brand in a large category with great potential to move online."
Diller added he has followed the online gaming space for a while, looking for an opportunity to enter the $450 billion global industry.
IAC has a history of building businesses and later splitting them into separate companies - travel site Expedia Group Inc and ticket booking site Ticketmaster are some examples.
Shares of IAC, which recently completed separation of Match Group into a separate company, fell about 1% after the news.
(Reporting by Nilanjana Basu in Bengaluru; Editing by Shailesh Kuber)