Quoting the folks who designed our 10MW data center, the main reason liquid cooling might be a good idea is that it gives you "high quality heat".
For obvious reasons it's hard to run air cooling much higher than the 100F or so that we run hot aisles in our data center, and in my experience even that sucks quite a bit. If you cool your racks like we do, with chilled water from a central A/C system running to heat exchangers in your racks, the return "hot" water is probably going to be something like room temperature, and depending on your climate, for much of the year you're going to need quite a bit of A/C to dump that heat into the outside air. (some of you might recognize chilled water to distributed heat exchangers as being a common office air conditioning setup. Those of you who don't are the ones who never had one of those exchangers go bad right above your colleague's cubicle)
In other words, what big air-cool data centers are doing is generating heat in a server, blowing it out into a (typically enclosed) air space, and then using fans and something that's basically the opposite of a radiator to suck the heat back into a pipe full of water so they can get it back to the central A/C system and get rid of it.
With liquid cooling you get rid of that horribly clunky intermediate step, and more importantly you can run the water a lot hotter than you can run the air in a room used by humans. If the water coming from your racks is 70C or so, it's really easy to get rid of the heat - all you need to do is pump the water around to an outside radiator or evaporative cooler. (well, with a heat exchanger or two and some other complicated but non-power-sucking stuff, but we don't need to get into that)
Basically you want the heat to run "downhill" - if you can extract heat in a form that's significantly hotter than the great outdoors, then all you need is a bunch of pumps to get rid of it.
And that, in a nutshell, is the argument for datacenter water cooling - it's much more efficient at a whole-facility scale, as it gets rid of almost all your air conditioning and turns it into mere water pumping. It might also let you put more watts into a rack because you get rid of that blowing-air-around step in the cooling chain, but that's probably a secondary benefit. Finally, since your existing data center cooling probably involves pumping chilled water around already, you might be able to convert over incrementally, or mix air and water cooling.