To seal water spotting or other stains on drywall, use a pigmented shellac primer such as BINS Bullseye. One or two coats will completely seal the stains, then repaint with your regular paint. When using shellac primer, be sure to have denatured alcohol available for cleaning your stuff.
What's up there depends on the age of the home and how much the contractor cared when they spec'ed it. Most likely, the ceiling is some form of gypsum board that is then plastered, textured and painted. The result of water leakage on gypsum board is usually that the entire board starts to sag under its own weight; alternately, the outer layer of paper, along with any spackle, texture and paint, will peel away with the damp.
Unfortunately, drywall repair == drywall replacement. You have to cut away the damaged portion, fit and screw a new piece of drywall into that hole (using rust-resistant screws as this area already has a reputation for moisture), then tape, spackle, seal, texture, prime and paint.
On top of that, many types of ceiling texture such as "popcorn" ceilings are simply impossible to blend in with when you do a repair like this; tiny differences in the application of the texture along with the sudden stop/start to the old texture around the patch will make repairs obvious. To really do the job right, you have to re-texture the entire ceiling by scraping off the old stuff, smoothing the surface with sandpaper or plaster, then reapplying texture, priming and painting.
If you're going to do all this anyway, I would recommend replacing the entire piece of drywall that has been leaked on with a more water-tolerant product like backer board (DuRock, Hardee-Backer, etc). This product is normally used in areas where water and/or heat can be a problem, and are durable enough to get soaked without crumbling apart unlike gypsum board. These products are generally a different thickness than drywall so you'll need to level the ceiling with lath strips of the proper supplemental thickness on the joists. After that, installation should proceed much like with drywall (you may need to smooth the surface with more plaster; backer board is commonly used as underlayment for tile and so often has a mesh that grips thinset).
Best Answer
Dry things out with fans to prevent mold. Standard joint compound softens when it gets wet, but it's not necessarily bad at that point. Once that's done thoroughly...
Cut away all loose material with a utility knife and scraping tool. Any tape that has blistered will need to be replaced. Cut it back to solid attachment.
Patch with joint compound and your preferred tape (where needed). Texture to match where necessary.
Prime and paint.