They end up extorting even more money from the local populace, and try and extend their fangs into other activities.
I’m not saying that legalizing drugs won’t help at all. But it’s unlikely it will help in places that already have gangs without other actions in addition.
Gangs exist as the most promising form of employment for people without other options. If you destroy the gang's single largest source of revenue, then it reduces their relative attracting as an employer. There are alternative to drugs like human trafficking, arms dealing and the wildlife trade but they have much much smaller markets. Perhaps in the short term violence would increase as gangs try to find a replacment for drugs, but even in the medium term I strongly believe that recruitment would plummet and attrition would rise as the money ran out.
Sure they aren't going to disappear overnight. But cutting out their most profitable product lines would make a huge dent without a doubt.
We have a real-world example of that from Prohibition so it isn't entirely theoretical.